Rising interest rates, a stronger dollar, higher inflation, and larger deficits. What’s Next?

Index CloseChange% Chg
NIFTY 50 15294 -9085.16%
NIFTY BANK32743 -1741-5.05%
Weekly percentage changes in Nifty and Bank Nifty.

Is this the beginning of a new economic cycle?

The Nifty fell by about 5.61 percent on a weekly basis. This was the worst week in the last two years. During the week, the Nifty also hit a 52-week low of 15,183.40. Is this the beginning of a new economic cycle?

On the daily data chart, a long bearish candle formed on Thursday, showing bearishness ahead. And on Friday, FII/FPI sold shares worth Rs. 7818 crores; DII support saved the day; otherwise, it could have been a black Friday.

The S&P 500 closed at 4797 on Monday, down 21.8 percent from its high in January, confirming the bear market in US Equities.

Similarly, the Nifty is down 17.3 percent, or 3184 points, from its recent high of 18477 on October 18, 2021. The Nifty is grinding low and charting into the bear territory. Technically, only a 3% drop will place the Nifty in the bear market zone.

New economic cycle

The entire macroeconomic environment has changed. It is the start of a new economic cycle. We are transitioning from-

  • a low-interest-rate environment to a high-interest-rate environment with high inflation,
  • low commodity, fuel & energy, and labor costs to higher prices,
  • quantitative easing (QE) has given way to quantitative tightening (QT),
  • low deficits to increased government spending, and greater deficits.

The transition to the new cycle will not be easy; in fact, it may be challenging at first. Inflation in some developed countries has reached 30- or 40-year highs.

A few quick fixes, like curbs, bans, duty hikes, market intervention, and rate increases, may not be sufficient. The world’s central banks have lagged, and there is still much work to be done to catch up.

Rising interest rates, a stronger dollar, higher inflation, and larger deficits characterise the new economic cycle.

Read previous related blogs here.
Has the Global Downturn started?
How the rising interest rates will affect You? 

Market – Weekly Update

The Nifty closed in the red for the second week in a row, at 15294. Similarly, the Bank Nifty was down by 1741 points or 5.05 per cent during the week. It was one of the worst performing week.

The broader market was also under pressure. The Nifty Midcap 50 was down 5.64 percent during the week. Meanwhile, Small cap 50 was down 8.26 percent during the week.

New economic cycle and Nifty weekly data chart. Bearishness ahead.
Nifty – Weekly data chart. A long bearish candle formed during the week..

Structurally, nothing major changed during the week. Rather, the weekly price action is confirmation of the below concerns. The concerns of the previous weeks remain as is, which are:

  • Geopolitical- Russia Ukraine War 
  • Rising Inflation
  • US Fed and RBI tightening policy
  • Rising Interest Rates 
  • FII selling from Emerging Markets
  • Rising US Dollar

Nifty Market breadth and Volatility

The market breadth was negative during the week, the weekly advance-declined ratio was 0.43. Similarly, the volatility index India Vix rose 16.24 percent and closed at 22.76.

Top Losers of the Week

The top losers in the Nifty 50 were ONGC (-14.55%), HINDALCO (-13.47%), Tech Mahindra (-13.06%), WIPRO (-12.15%) and IndusInd Bank (-11.61%).

Nifty Sectors and Broader Indices

Metal -9.14%
Oil and Gas -8.52%
IT -8.18%
Auto -4.94%

FMCG -3.11%

Looking forward

Because of heavy selling during the week, the RSI and MACD indicators are reading low, showing the possibility of a relief rally next week.

Further, the valuations remain high and above long-term averages, FII/FPI are selling continuously, and investors expect a relief rally, but the timing of it is difficult to predict.

Nifty Weekly Pivots

S2 S1 R1 R2
Pivots are calculated using the weekly data.

As per the above pivots data, 15000 to 15750 is the Nifty 50 trading range for the next week. The support is around the 15000 level, and then around 14750 level. If the market breaks the 15000 level, such a break can drag the Nifty down to 14750 or below levels in the short term. And on the upside, we might again see selling around 15800 level.

Referring to the above chart, the Nifty has broken through the 15800-16800 level box on the downside, and 15800 is now a major resistance to overcome before any meaningful run.

Further, the Nifty closing price is below the 20-day moving average, as well as the 50-day and 200-day moving averages. Furthermore, the 50-day moving average price is less than the 200-day moving average price.

For the upcoming week, the bias is negative. Selling begets more selling. There is a possibility of sellers coming at the upside bounce to sell on the rise.

We must realign both returns and expectations to the new economic cycle. The world is not flat anymore. Vocal for local is everywhere.

It’s time to get your umbrellas out because it’s raining outside. Any change or new economic cycle, on the other hand, is also an opportunity for those who will adapt to the new normal and change their trading strategies accordingly.

Read our earlier blogs here.
How does the rising dollar impact you?
Why the Retail Investors losing interest in the stock market?
“Invest in Peace, Bro,”

This article is only for educational purposes and is not an investment advice. Please consult with your investment advisor before investing.

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