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The US inflation has affected otherwise positive macro environments

The US inflation has affected otherwise positive macro environments

For the second week running, the Indian market maintained its positive momentum for the new year. Nifty/Sensex rallied 443/1478 (+2.5% each) to close at 18,255/61223. The broader market outperformed, with the midcap 100/smallcap100 up 2.8%/3.6% each. After being net buyers in week one of the new year’s, foreign institutional investors were again sellers and sold equities totalling Rs 4,000 crore.

Global cues were mixed. US inflation data rose 7% for CY21, the largest annual rise since 1982. This was due to supply chain disruptions and labor shortages. A number of Fed officials expressed concern about faster interest rate increases to combat inflation.

Domestically, the market rallied on the expectation for a pro-reform budget and strong corporate earnings, as well as the low impact of 3rdCovid on the economy. However, theretail inflation soared to 5.59% in December from its previous six-month high. The Index of Industrial Production (IIP), data came in below expectation, which caused some caution in equity markets. Investor sentiments also suffered on the last day after the United Nations report, which predicted India’s GDP at 6.5% for FY22, down from 8.4% in its earlier forecast.

Inflation levels in the US are at an all-time high, which is affecting macro data’s positive outlook. In just 20 days, the Nifty has risen sharply by more 10% from its recent lows at 16,400 levels. Positive macro data points and the low impact of Omicron have helped to improve sentiments.

However, valuations are not cheap anymore and require strong earnings delivery to sustain positive momentum in the market.

Investors continue monitoring the impact of central banks tightening monetary policy and the spread Omicron Covid-19 variant.

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Despite Fed rate increases, the Nifty has performed well over these two periods. We expect the market will remain stable in the future due to expectations of strong corporate earnings seasons, upcoming budgets and positive macroeconomic data.

The main risk in the short term could be any changes made by the government to restriction norms due rising cases.

(Thewriteris Head Retail Research MOFSL).

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