Indian markets are hitting new highs and defying the ‘September effect’, considered the worst month for global stock markets. On Thursday, while the S&P Sensex crossed 83,000 for the first time, the Nifty 50 touched a record high closer to the 25,000 level. The sharp rally driven by banking, IT and auto stocks gained strength from a host of factors including interest rate cuts in the US, China and Europe. Helpfully, fresh data first from the US and later from India confirmed that inflation was no longer persistent and was steadily falling back to the respective central banks’ target zones. Besides favourable inflation data, the market soared to the mere expectations of rate cuts in China and Europe. While the buzz for a 50-basis-point cut in China will likely boost demand and goose the economy, the European Central Bank’s 25-bp cut provided a much-needed sentimental boost.
While global rate cuts are a certainty, the biggest question is the quantum of cuts. According to analysts, a 50-bp cut by the US Federal Reserve next Wednesday, instead of the traditional 25-bp reduction, could unleash market mayhem. A bigger cut would confirm the worst fears of a hard landing for the world’s largest economy, even though such a cut could keep recession at bay ahead of the presidential elections in November. But the very idea of a 50-bp cut is straining investors’ nerves—if the Fed actually delivers, it could trigger a global market shock. As it is, lacklustre data from China is sparking concerns about the state of the overall global economy as analysts sense the world’s second largest economy will end up dragging down both the US and Europe along with it.
Apart from recessionary fears, analysts are also worried about Fed rate cuts strengthening the Japanese yen, which is battling troubles of its own. When the Bank of Japan tried to intervene and course-correct its yen carry trades last month, it caused a global market crash overnight. A strong yen will be detrimental to all the US risk asset classes and how the market responds to the Fed rate cuts will be closely watched. In short, the global markets seem to have tied themselves up in knots. Hence, investors must tread with extreme caution.