After the longest streak in the last 2 years, the markets finally snapped into a 1% decline on Friday, August 19, 2022. Since July 2022, the markets have been up 13% - a massive rally in a very short period.
However, there are reasons to believe things may cool down for a bit - even if it's just a bit.
1. The dollar is strengthening again
Over the past two months, the dollar had shown signs of weakness. However, the dollar index is now at a one-month high, sparked by comments by Fed members which indicated a likely continual of the pace of rate hikes in the US.
Higher interest rates in the US = More money flows into the US = The US$ does better = Bad news for emerging market currencies = Sad happens on the markets.
2. No slowdown seen in rate hikes
While inflation in the US inched slightly lower, led by falling food and gas prices; the job market is still steaming, causing rate-hike anxiety in the US. Fears of continued a 75bps hike in September 2022, and maintenance of the pace of hikes in 2022 have been giving the recent rally a little bit of a break.
3. Corporate earnings and valuations
Corporate earnings have been seeing downgrades, thanks to high inflation affecting demand and profits. Coupled with the recent sharp rally, the Nifty now has again become the most expensive market in Asia.
Elevated valuations seem to make it difficult to make a case for material upside from here, unless there are visible and immediate triggers.