US, China moves may have big implications for Indian equity markets

If the Fed announces a taper, it could trigger a correction till 14,000-14,500 in Nifty in next 2-3 months

Recent moves by China’s regulators and policymakers and decisions at the US Federal Reserve’s ongoing policy meeting will impact global markets, this week. The impact on sentiment could set new uptrends, or trigger sharp corrections.

In the past few months, China has cracked down in various ways on major tech players operating across finance, ride-hailing, education, food delivery and property markets. The Chinese policy seems aimed at dissuading Chinese tech companies from listing abroad. China has also taken various measures to cool prices across booming metals markets. It has auctioned some of its reserve base metal inventory and it has imposed export controls on steel. This has led to China-listed stocks and stocks in Hong Kong getting hammered and FPIs appeared to be cutting China and Hong Kong exposures. The Yuan has weakened.

In the US, a fast economic recovery is coinciding with surging inflation. The US Fed will have to consider accelerating its schedule for tightening money supply, via the taper, and perhaps, raising policy interest rates earlier than it wished to, as well. The FOMC is in meeting this week. Financial markets will be on edge until that meeting ends. US bond yields and stock market indices could be volatile.

The Dollar Index is also volatile. The USD has strengthened in the past week on assumptions that bond yields will rise. But it has lost a little ground this week because of the China situation and a rise in other hard currencies as FPIs rebalanced China exposure. The Euro, Yen and even the GBP have hardened.

The Indian market could be a beneficiary of the China pull-out if the FPIs' outflows from China and Hong Kong move into rupee assets. It could also be adversely affected if FPIs decide to pull back Emerging Market exposures and move more permanently into hard currency assets.

By Friday, we should have clarity on the Fed stance at least. The FOMC decision will clearly affect currency markets one way or another. If the Fed reassures, by sticking to the easy money policy, it will be a risk-on situation where Emerging Markets (ex-China) would benefit. The USD is likely to weaken if there’s no taper and bond yields would fall. If there’s a taper, there could be a taper tantrum where USD yields are pushed up. 

China and Hong Kong are among the worst performing stock markets in the last month or so, with the market benchmark indices having fallen to 2021 lows. The Shanghai Composite is down 4 per cent in calendar 2021 while the Hang Seng is down 7.2 per cent. The Nifty has lost a little ground from its recent high of 15,962 but it is up 12 per cent in calendar 2021. The Dow Jones is up 16 per cent.

The FPIs have pulled out nearly Rs 10,000 crore (net sales of Rs 8,682 crore equity, net sales Rs 1,126 crore debt) in July but they are net positive in calendar 2021 (net buys of Rs 51,662 crore equity, net sales of Rs 23,277 crore debt). If there’s no taper, there could be fresh FPI buying. If there is a taper announced, the nervousness could trigger selling with a correction till the 14,000-14,500 band over the next two-three months.