US Fed outcome: What next for the markets?

Though US Fed's decision augurs well, analysts say, RBI's stance on rates, corporate results and outcome of Bihar elections are the next triggers for a market rally

The US Federal Reserve (US Fed) kept interest rates unchanged in its policy review meeting amid concerns over weakening global economy, especially in China. Financial market volatility and sluggish inflation at home also weighed on the decision.

"With the overwhelming majority in the FOMC still expecting to hike this year, and the domestic economy maintaining its momentum, we stick to our call of a December rate hike," points out Philip Marey, senior US strategist at Rabobank International in a note.

Following the development, the Dow Jones industrial average ended down 65.21 points, or 0.39%, to 16,675 levels, while the S&P 500 closed 5.11 points, or 0.26%, lower at 1,990. The Nasdaq Composite ended flat, down 4.71 points, or 0.1% at 4,894 levels.

Most Asian markets, however, traded mixed on Friday with Straits Times, Hang Seng and Taiwan Weighted moving up 0.2% - 0.7% in intra-day deals. Nikkei, however, lost 1.5%, or 256 points in intra-day deals. The S&P BSE Sensex gained nearly 350 points and the CNX Nifty also moved up over 1.25% and hit the 8,000 mark.

Outlook

So what's the road ahead for the Indian markets? What are the likely triggers that can take them higher and will they be able to get back foreign flows now since the lift off in interest rates by the US Fed has been deferred?

As far as the Indian equity market is concerned, analysts say the postponement in lift off by the US Federal Reserve offers a good opportunity to enter. However, given the uncertainty surrounding China, one must stagger investments, they advise.

On the domestic front, an improvement in corporate earnings, Reserve Bank of India's stance on interest rates and the outcome of the Assembly elections in Bihar hold key.

"The domestic economy would be in a better position to manage the US rate hike, which is expected to happen significantly in 2016 as any hike in December would be only a marginal one to start with. Over the next three months, the domestic macroeconomic factors and corporate earnings for the September quarter would decide the course of market direction, which we believe would be in a positive direction. We suggest investors to deploy any cash remaining with them in the equities now," points out G. Chokkalingam, Founder & Managing Director, Equinomics Research & Advisory.

U R Bhat, managing director, Dalton Capital Advisors believes that the next trigger for the market is the RBI's stance on interest rates and a 25 basis point (bps) cut in interest rates is more or less factored in.

"The markets are now gunning for a 50 bps cut in the policy, or before. Given the push that the government is giving, they may as well do a 50 bps cut. Having said that, it still don't think it is a good time to invest. The fact that the US Fed has talked about China being one of the reasons why they haven't lifted rates, that itself shows that China is probably much bigger a worry that we initially thought. I don't think it is a good time to go all out and buy," Bhat says.

Adding: "As regards flows, the FIIs may kick the can a bit further down the lane. The markets have responded to a particular rate hike potential by the US Fed over the last couple of months and we have seen outflows in the emerging markets, including India. But converting this into inflows will take some more time."