Easing commodity prices aid market rally; indices jump 2.6% during week

FPI selling in June nears Rs 50,000 crore

The benchmark indices rallied close to 3 per cent this week on optimism that easing commodity prices will help cool inflation and boost corporate earnings.

In the preceding week, the indices had plunged about 6 per cent – their worst weekly showing in over two years – on concerns that aggressive monetary tightening by central banks will trigger a global recession.

Those same fears, however, also led to a sell-off in commodities like Brent crude, steel, iron ore, and other industrial metals. The fall in input costs, coupled with attractive valuations, helped the market recover from last week’s rout, said experts.

The benchmark Sensex ended Friday’s session at 52,728, an increase of 462 points or 0.8 per cent. The Sensex gained 2.6 per cent or 1,368 points in the week. The Nifty ended Friday’s session at 15,699, a gain of 142 points or 0.9 per cent. It rose 2.7 per cent in the week.

Brent crude was trading near $112 a barrel on Friday , down 12 per cent from the second week of June.

“The recent correction in the prices of several commodities, especially industrial metals, is providing some light at the end of the tunnel with hopes of some of the inflationary pressures easing out. The combination of softening inflation (aided by a possible easing of supply shocks) and a weakening economy could put the global central banks on the back foot and [they could] go less hawkish in their tightening cycle, which will be supportive of equities,” said Milind Mucchala, executive director, Julius Baer India.

However, some called the latest rebound “technical” and said stocks will remain under pressure as central banks have just started their rate-hike spree. Besides, sustained selling by foreign portfolio investors (FPIs) is proving to be another pain point.

On Friday, FPIs sold shares worth Rs 2,354 crore, taking this month’s selling tally close to Rs 50,000—the highest for a month since March 2020, the peak of the Covid-19 sell-off.

“The pace of such (FPI) withdrawals was last seen when the pandemic spurred in the first quarter of 2020. Globally, the ongoing military conflict between Ukraine and Russia, rising US Fed rates, and the return of the pandemic outbreak have added more fuel to the fire,” said Manoj Purohit, partner and leader – financial services tax, BDO India. “This short-term pace of volatility is likely to slow down in the coming weeks if not reversed completely.”

This week, US Federal Reserve Chairman Jerome Powell reiterated the central bank’s resolve to tame inflation and acknowledged that recession could be an outcome of this fight. In his testimony to US lawmakers, Powell said a soft landing of the economy is very challenging.

Analysts said investors are pricing in the possibility of US Fed action beyond December.

The market breadth was strong on Friday, with 2,391 stocks advancing and 932 declining on the BSE. More than two-thirds of Sensex stocks ended the session with gains. Reliance Industries rose 1.47 per cent and contributed the most to the index’s gains. ICICI Bank rose 2.02 per cent, and HDFC Bank rose 1.3 per cent. The broader market underperformed the large-caps this week as the Nifty Midcap 100 index rose 2.2 per cent and the Nifty Smallcap 100 index gained 1.8 per cent.