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And There Comes the Fall 🌩️

Let’s start with a (not so) fun fact: The Nasdaq, down 27% this year so far, has given up all its 2021 gains. Let that sink in. And for the same reasons that we’ve been speaking about: INFLATION!

Whether it’s war, or sanctions, or interest rates, or supply chains, they all either come from or go back to inflation. By the way, the Indian markets fell another 4% last week - falling by 8% so far in May 2022.

So, what’s up?

The big news last week

Consumer prices in the US were up 8.3% in April, from a year ago. The pace of inflation slipped a wee bit from the previous month, falling for the first time in the last in 8 months. But it doesn’t move from the fact that it is still near its 40-year highs. The largest contributors to inflation in the US? Food, travel and housing.

Hikes coming

The Fed has already raised rates twice this year. However, the April inflation data provides little relief. The Fed is likely to continue on its path of increasing rates through the rest of the year, and also start offloading its balance sheet.

EMs at risk

In this scenario, investors have been flocking out of emerging markets, including India. And that’s resulting in added pressure on the Indian stock markets. With more rate hikes coming, the money flow is only likely to continue going ahead.

Factors feeding inflation

While rate hikes have started, the factors causing inflation still continue. The war is still on, and supply chains continue getting disrupted. Russia and Ukraine account for a good chunk of the world’s oil, gas and food, and all three continue to be in short supply. And that in turn has led to a protectionist-like movement, with Indonesia banning the export of palm oil and India for wheat.

And to India

India has been seeing its fair share of inflation. The RBI even got into action a couple of weeks ago with it hiking rates by 40bp, which also triggered this sell-off in India. Inflation is likely to continue being a problem as long as the war and sanctions don’t see any signs of easing. Add to that higher rates and money flowing out of EMs, and the markets indicate further softening. Of course, with some short respite rallies.

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