Sensex powers up over 1,000 points: What's fueling the surge on Monday?

The Indian equity markets staged a strong comeback after a sharp selloff seen in the past few weeks. Frontline indices BSE S&P Sensex was up over 1,000 points at 55,925 levels, whereas, Nifty 50 touched three-week high, floating above the 16,650 mark. Broader markets, too, reflected resilience as Nifty Midcap 100 and Nifty Smallcap 100 rose over 2 per cent and 3 per cent, respectively.
 

Analysts believe that the improvement in global sentiment on the back of consumer resiliency and peaking inflation brought cheer back to the Dalal Street. Investors got a respite from the painful selloff after the US markets closed on a positive note last week.

All three major US indexes closed over 6 per cent higher last week. While Dow Jones snapped its eight-week losing streak, S&P 500 and Nasdaq recovered from their seven-week losing streaks. Asian markets too, rejoined the solid upside set by global peers as Japan’s Nikkei rose 2.12 per cent higher and Hong Kong’s Hang Seng index closed up by 1.87 per cent.

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All this, analysts believe, has given some fodder to the bulls. The markets, analysts said are set for a near-term rally after a sharp sell-off in the past few weeks.

"The sharp upswing in Nasdaq and S&P 500 late last week indicates near-term trend reversal. The decline in dollar index and the US 10-year bond yields, too, are positives for risk particularly in emerging markets. The beaten down IT segment is likely to stage a good comeback assisted by short-covering. Financials, particularly the leading banks, have more room to go up assisted by delivery based investment buying. However, Brent crude at $120, however, is a major macro headwind," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.


 

Here are key factors that drove the rally on Monday’s trade:
 

Strong global mood: US markets shut shop on Friday on a strong note backed by healthy US consumer spending for the month of April. Consumer spending that accounts for more than two-third of the US economic activity, rose 0.9 per cent last month. While expenditure for goods increased by 0.8 per cent driven by new motor vehicles, clothes, footwear, spending for services outlay rose by 0.9 per cent in April. Data by US commerce department on improvement of goods trade deficit also boosted the investor sentiment.

WATCH VIDEO: Sensex, Nifty could witness biggest May decline since 2012. What next?

Covid curbs ease in China: The relaxation of covid-19 curbs in major cities like Beijing and Shanghai also contributed to investors’ confidence. Shanghai announced a slew of stimulus measures and both Shanghai and Beijing eased Covid-19 restrictions. The devil is in the detail of course, and corkers in both cities still face challenges either going to work, or even being allowed to leave the house. Asian markets, analysts said, is pricing in peak virus in China and a recovery in growth. Japan’s Nikkei 225 rose 2.21 per cent, Topix up by 1.81 per cent, and Hang Seng’s Hong Kong advanced by 1.87 per cent.

Declining dollar and yields: The dollar edged lower on Friday, registering second weekly decline as investors’ digested the rate hike expectation and peaking inflation on the back of strong consumer spending data. The dollar index dropped to its lowest level since April 25 at 101.43. The minutes from the US Federal Reserve’s May meet signaled at 50 basis points (bps) rate hike in its June and July policy meetings. Analysts believe that the markets have fully priced in the expected Fed’s rate hike, hence the broader rally in rally is behind us. That apart, the 10-year global bond yield moved lower by 1 bps to 2.74 per cent, which also boosted equity market sentiment. 

 

Monsoon's date with Indian shores: Southwest monsoon has set in over Kerala on Sunday, three days ahead of its normal onset date of June 1, the India Meteorological Department (IMD) said. This, analysts believe, is a good news for the India that is battling soaring inflation. Timely and normal rains can boost production for monsoon-sown crops such as rice, soya beans and pulses etc.

Rate hikes priced-in: According to the recent minutes of RBI meet, members of the monetary policy committee argued for front-loading interest rate hikes amid rising inflation. Analysts believe that the Reserve Bank of India’s expected rate hike is already priced in the markets; hence the strong pullback is here to stay. Ajit Mishra, VP – Research, Religare Broking says, “Considering the sticky inflation and global monetary tightening, markets are already discounting the 25 bps rate hike.”