Every week, Niraj Shah studies how top business leaders and market makers are navigating the fast-changing financial landscape.
This week was punctuated by capitulation in risk assets (read Bitcoin), a subsequent bounce in many of them, and some good feelers around inflation, particularly food inflation. As Charlie Billelo of Compound Capital Advisors noted, a big positive on the U.S. inflation front was that fertiliser prices in America ‘peaked in late March and have been trending downward since, now at the lowest prices since late January, which is important given their high correlation with food prices’. At the same time, there was a serious fear overhang as well. Elon Musk and Nouriel Roubini seemed certain about a recession in the U.S. Since we have written a lot on inflation recently, let’s try and talk about other things. As you will see, despite the best efforts against it, inflation will weave its way in.
Everyone from U.S. Federal Reserve Chair Jerome Powell and Musk to Roubini and India’s Monetary Policy Committee sounded the bugle of caution. Powell told U.S. senators that a soft landing will be “very challenging” while aggressively tightening policy to combat inflation. Musk, the world’s richest man, believes that it is more likely than not that there is a U.S. recession in the near term. Goldman Sachs economists cut their U.S. growth forecasts and warned that the risk of recession is rising. Roubini said he expects a U.S. recession by the end of the year.
India’s Monetary Policy Committee expressed the belief that more rate hikes would be needed to quell inflation pressures, which, in turn, would mean some degree of economic pain, in the minutes of its June meeting released this week. All this aggregated opinion is a stark contrast to the optimism of 2021. Since that fizzled out, can this pall of gloom be short-lived too? Those expecting a mild U.S. recession to be followed by a sharp pickup will be hoping it does.
One of the talking points was the big selloff we’ve seen in Indian mid- and small-cap stocks. On Monday in particular, when mid caps cracked, FIIs sold only Rs 1,217 crore worth of stocks and DIIs bought Rs 2,094 crore worth of shares. The point, therefore, was the nature of the selling, which was symptomatic of capitulation.
Picture this, delivery-based selling in some stocks was low, but price action was high. BDL ended down 11% on a delivery value of only Rs 62 crore and market-cap of Rs 13,133 crore, HAL was down 10% with a delivery value of Rs 108 crore on a market-cap of Rs 57,690, and Triveni Engineering fell 6.5% with a delivery value of Rs 5 crore on a market cap of Rs 5,710 crore. This suggested a lack of buyers on a particular day, and it was evident that it was only a day-long process, as the bounce in the subsequent days was swift. Watch out for the bounce, as a lot of quant indicators were on the oversold side and therefore, it may not be a surprise if it extends itself.
A bunch of greed and fear indicators, including the one run by analysts at Quant Mutual Fund, registered its highest ever reading since the Covid crash of 2020, and at times, bounces from such levels can be sharp and large.