Strong start: Sensex sees the best first week of year in a decade

The benchmark indices ended the first week of trading in CY22 on a high note as a bunch of economic data made investors hopeful about the economy's resilience amid the fresh wave of the Covid pandemic. During the week, the Sensex gained 2.6 per cent, the best first five-session gains since 2012 when it had risen 2.7 per cent.

The Federal Reserve's plans for a faster-than-expected hike in rates and the sudden spike in daily Covid numbers, however, led to volatility and indices pared most of their gains in the latter part of the week. The benchmark Sensex on Friday ended the session at 59,745, following a gain of 143 points or 0.2 per cent. The Nifty50, on the other hand, ended the session at 17,812, a gain of 67 points or 0.4 per cent. 

The markets began the first week of the new year on a solid note, hoping that rising cases may not lead to further lockdowns. Economic data, including goods and services tax (GST) collection and purchasing manager's index (PMI) numbers, reassured investors that the economic recovery is on track. 

The PMI for December stood at 55.5, marking an expansion, though it fell from the 10-month high of 58.1 in November. For December, the GST collection stood at Rs 1.29 trillion, the sixth consecutive month when the mop-up was above the Rs 1-trillion mark.

However, the Federal Reserve’s reports showed its top officials were inclined towards hiking rates faster than expected and that rattled investors. Besides, the sudden spike in Covid numbers in India shook the assumptions about the sustainability of the country’s recovery from the pandemic. On Friday, India's daily number of cases breached the 100,000-mark.

Investors are keenly watching the US jobs data to gauge the Fed's course of action. Projections for the non-farm payroll data showed that the US hiring might have doubled in December from the previous month. However, some experts said that there would be little change in the Fed's stance even if the job numbers are less than expected. 

The Fed's change of mind to prioritise fighting inflation has spooked investors. The removal of monetary support and low lending rates is a drastic shift not seen since the outbreak of Covid.

The market's double-digit gains last year were powered by low-interest rates and aggressive bond purchases, which insulated equities from the adverse effects of the pandemic. Moreover, some experts opined that elevated valuations and rising interest rates did not augur well for equities and said the gains this year would nowhere be close to what the markets saw in 2021. 

“This is going to be a year of low returns with more corrections in the offing. Valuations are still expensive, and we have central bank action to fight inflation. It will be a tug of war between valuations, earnings, and central bank tightening. The initial part of the upcoming earnings season will be good but some companies will face margin pressure because of high commodity costs," said Jyotivardhan Jaipuria of Valentis Advisors.

V K Vijayakumar, chief investment strategist at Geojit Financial Services, said that a bit of volatility may persist until a consistent pattern of FPI investment emerges. "A major concern of FPIs is the tightening of monetary stance in the US with the 10-year US bond yield rising above 1.7 per cent. Rising bond yields in the US can trigger sell-off in emerging markets." 

The market breadth was firm, with 2,104 advances and 1,305 declines. More than half the Sensex constituents gained. Reliance Industries gained 0.8 per cent and contributed most to the index gains.