Can a Fed rate hike slowdown trigger global equity markets rally?

Only if more skeletons don't emerge from the closet

The US Federal Reserve (US Fed) is likely to slow down the pace of rate hiking cycle over the next few months in the wake of collapse of two prominent lenders, analysts believe, as they expect a relief rally in global equity markets due to the move.

Most analysts now expect the US central bank to hike rates by 25 basis points (bps) post its two-day meet on March 21-22 as fallout of the crisis surrounding Silicon Valley Bank (SVB) and Signature Bank. Earlier, analysts were expecting a 50 bps hike.

This relief rally, according to U R Bhat, co-founder and director, Alphaniti Fintech, however will be conditional.

“A lot would depend on the banking crisis in the US. If there are more skeletons in the closet that fall out over the next few weeks, the relief rally in the markets will be short-lived. That apart, the Russia-Ukraine war and its implications for commodity prices, possibility of El Nino and its impact on the Indian economy in the next few months etc. are some other factors that the markets will keep an eye on,” he said.

Back home, foreign institutional investors (FIIs) have so far withdrawn over Rs 33,000 crore from the Indian equity markets in ongoing fiscal 2023-24 (FY24). But, during the same period, domestic institutions have pumped in over Rs 2 trillion in the Indian equity markets, data show.

The Sensex and the Nifty, in this backdrop, have lost around 1 per cent and 2.4 per cent in the ongoing fiscal year, respectively. The small-cap segment has been the worst hit with the BSE Small-cap index sliding nearly 4 per cent thus far in fiscal 2023-24. The mid-cap index, however, was better-off with a marginal fall of around 0.4 per cent during this period, data shows.

“The US Fed is likely to go a bit soft and hike by 25 bps instead of the earlier expectation of a 50 bps hike given the recent developments. This, I feel, will be sentimentally positive for the global equity markets. Indian markets that have been range-bound since the past few months can see a relief rally and will also stand to benefit in terms of FII flows,” said Jyotivardhan Jaipuria, founder and managing director, Valentis Advisors.

Asian equity markets, wrote analysts at Nomura in a recent note, are relatively insulated from the impact of banking sector issues in the US, but do remain cautious in case of any adverse developments. They expect the MSCI All Countries Asia ex Japan Index to hit 700 by 2023-end, up over 12 per cent from the current levels.

“Although we do not think there is any material fundamental impact on Asian stocks from US banking sector issues, there is always the risk of some ‘skeletons emerging from the closet’. Overall, we continue to see medium-term value in Asian stocks.

The risk to the view is if US stocks are softer in the months ahead due to weakening economy/recession -- in which case there will be some impact. We are comforted by the fact that Asian stock valuations are much more modest (relative to the US),” wrote equity strategists Chetan Seth, Ankit Yadav, and Anshuman Agarwal of Nomura in a recent note.

For the Nifty50, Bhat of Alphaniti Fintech expects the rally to fizzle out at around 17,500 levels -- up a modest 2.5 per cent from the current levels -- in case things take a turn for the worse post the outcome of the two-day US Fed meeting next week.