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Why the markets rose despite problems

Updated: Mar 19, 2022

The war hasn’t stopped, inflation is still a problem, and the Fed just raised rates by 25bps - which was feared for so long. And then the markets moved higher, gaining 9% over the last 9 days. What’s up?

1. Russia-Ukraine conflict 🥊

The war has been on, and things have continued in the same direction since the last few days - aggression by Russia, attacks on more Ukrainian key points, increasing number of refugees, and more sanctions, making Russia the most-sanctioned country in the world.

But a few developments that the markets have been taking well are:

  • Ukraine stepped down from its pitch to join the NATO, effectively resolving one of Russia’s key concerns

  • There have been reports of significant progress between Russia and Ukraine on a ceasefire and withdrawal of Russia troops.

2. Inflation 🔺

US reported inflation at levels that are a 40-year high. Fears of inflation rising even higher was sparked by the Russia-Ukraine conflict as commodity prices started heating up, mainly across wheat, oil, natural gas and nickel.

But, some factors have led to a fall in the last 5 days:

  • Hopes of ceasefire in Ukraine, and supply chain issues not being so bad resulted in prices cooling off over the last week. Oil prices have dropped nearly 30% from their high in the last five days.

  • The US seemed much lesser affected compared to the EU because of lower dependence on Russia. The US gets only 7% of its oil from Russia, the EU depends on Russia for more than 40% of its gas. Plus, the US reported oil inventories that were higher than expectations, further easing fears.

  • China announced a lockdown as a COVID resurgence led to expectations of demand cooling down.

3. Fed rate hike 🏦

As inflation rose in the US, the markets were fearing a rate hike by the US, which would be its first since 2008, and also mark a reversal from its easing policy. This was expected to give a hard-landing to the US economy.

And as expected, the Fed did increase rates by 0.25%. But:

  • The Fed also signalled towards a rate hike in each of the 6 meetings left in 2022. And this more or less had been pried into the markets already.

  • Despite the normalisation in policy, the Fed expects real GDP growth of 2.5%, and an unemployment rate of lower than 3.5%. This indicates a very strong US economy, which may not have a hard landing led by all the rate hikes.

4. Stuff happening within our borders 🇮🇳

The Indian markets seemed to be getting affected by everything happening globally - the war, sanctions, commodity inflation, and the rate hike.

But, there were some domestic factors that created a good support for the markets:

  • The BJP swept state elections, surprised the street on its margin, and also gave indicators into what might hold for the general elections in 2024.

  • The upcoming election, and expected boost in spend on infrastructure has been creating pockets in the markets that look great to invest in. These are likely to continue providing support to the markets.

  • Foreign investors sold shares from the Indian markets aggressively over the few days. However, it is important to note that they have been net sellers every month since September. However, the dependence of Indian markets on foreign investors has reduced significantly over the last couple of years, with them selling, and with an increasing number of domestic investors.

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