GIFT Nifty and Asian Stocks Take Center Stage as US Fed Meeting Minutes Await

In early trades on Thursday, the Asian markets were trading sharply lower following losses in the US markets. Among the key triggers for the market on Thursday is the gist of the Fed minutes announced late on July 05, 2023. 

What the Fed June minutes actually said?

Here are five key points made in the minutes of the June Fed meet, published on July 05,2023; which is exactly 21 days after the Fed meeting. Here are the key points.

    • If you go by the minutes of the US Fed, they see the policy tightening not only as likely, but also essential to bring inflation under control. However, going ahead, the rate hikes would be measured and even spasmodic at times. There will not be any hurried front loading of rate hikes going ahead. 

    • Fed minutes underlined that the pause should be seen in the proper perspective. It was purely intended to allow the policymakers more time to assess the economy’s progress toward the goals of maximum employment and price stability. That could be the theme going ahead rather than trying to front load the rate hikes.

    • An important inference emerging from the Fed minutes was that rates must be seen in terms of its cumulative impact rather than one-off impact. After all, ten consecutive rate hikes are a bid deal and the central bank must give the market some time to adjust to the new order and for the impact on inflation to actually start showing.

    • The members are still predominantly hawkish on rates. For instance, after the pause in June policy, only 2 out of the 18 members expect just one hike as appropriate this year. A total of 12 members expected two or more rate hikes in this year. Members favour an immediate 25 bps rate hike in July policy due to tight labour conditions.

    • The consensus, even among the hawks, was that the pace of hikes should abate going ahead. Almost everyone agreed that the pace of rate hikes must be slowed after the deluge of front ending already done. However, members were unanimous that it was no advisable to relent on rates till the time inflation came decisively lower.

One point that came out from the Fed meet was that the focus would not only be on headline PCE inflation but on core PCE inflation, which had not come down with the same intensity as food and energy. Not surprisingly, the US markets were too pleased as they would have preferred a less hawkish tone from the Fed. That disappointment in the US markets also rubbed off on the Asian markets on Thursday.

Global risks reflected in the GIFT Nifty

The GIFT Nifty has now officially taken the position of the bellwether of the Nifty from SGX Nifty. While global investors still get benefit trading in the GIFT Nifty, the volumes are done right here in India rather than being exported to another country. For the GIFT Nifty in early trades on Thursday, there were several risks, apart from the Fed minutes which were anyways more hawkish than expected. Among other factors that disappointed the Gift Nifty was the Services PMI data, which came in lower than anticipated, showing pressure at higher levels. 

Also, there are signs of rising trade tensions between the US and China after China put a ban on export of key materials used in the manufacture of microchips. Above all, there was also the baggage of an index that had rallied very rapidly in the past few weeks to cross key resistances like 18,800 and 19,000 and the power of short covering had taken the Nifty to well above 19,400. That euphoria is gradually waning in the markets. In short, the caution in the US markets did rub off across Asia and India was no exception, although the VIX still remains salivating and attractive.

Europe, Oil, and Gold

Let us turn to the asset classes we have not spoken about till now. We start with European stocks, which fell sharply on Wednesday after the Eurozone economic activity weakened in the month of June 2023. In fact, the EURO STOXX 50 index closed 0.9% lower, which is the worst session since the end of May 2023. Even the FTSE and the DAX of Germany corrected sharply in Wednesday trades. 

Energy continues to be a two way game although Brent prices crossed above the $76/bbl mark. Crude prices were steady to positive on the back of expectations of tighter supply with output cuts from Saudi Arabia and Russia. Also, the markets are pencilling in a larger-than-expected drop in US crude stocks. However, weak Chinese demand remains an overhang and is likely to resist any major up move by the Fed.

Gold prices were flat as investors digested minutes from the Federal Reserve’s latest meeting. Higher rates are not a good signal for gold as it increases the opportunity cost of holding gold. That has led to weakness in gold prices, especially after the price of gold briefly crossed above $2,000/oz in trade about a couple of months back.