Financial markets are closely monitoring the bond market following the US government’s successful avoidance of a shutdown. The recent quarter has seen negative impacts on Asian markets, as rising treasury yields and oil prices take their toll on equity markets. September proved to be the worst month for US stocks since 2023, and the weakest month for global bonds since February. These outcomes followed the Federal Reserve’s decision to maintain interest rates at their highest in 22 years during their previous meeting.
A report by Goldman Sachs Research highlights the increasing stress in developed economies due to the soaring government debt. Since the 2008 financial crisis, the average ratio of government debt to GDP in developed markets has risen to around 100 percent from less than 70 percent. As central banks raise interest rates to combat inflation, concerns over these escalating debt burdens are growing. The potential ripple effect on the bond market is causing further apprehension.
The unease surrounding the US Federal Reserve’s anticipated decision to continue holding higher interest rates has crossed the Atlantic and affected the European bond market. The Italian government’s larger-than-expected budget deficit rattled the European bond market this week, leading to nervousness spreading to equity markets.
However, the rise in interest rates has helped cool down the oil market, with prices reaching a 10-month high. Expectations of increased oil prices and inflation impacting oil demand prompted traders to secure profits on Friday. With an upcoming OPEC meeting scheduled for October 4, many traders opted to hold cash rather than speculate on potential actions by the oil cartel.
Indian markets experienced consolidation within a narrow range, with the BSE Sensex closing the week with a 0.27 percent decrease, and the Nifty50 falling 0.18 percent. However, smaller indices saw some traction, with the BSE Mid-cap Index gaining 1.2 percent and the BSE Small-cap Index adding 1.3 percent.
The market’s behavior suggests that it may be bottoming out, as evidenced by a positive divergence between Nifty and the daily swing indicator. While Nifty reached a new low during monthly expiry, the daily swing indicator did not, indicating a potential bottom. The historically low Rohit Momentum Indicator (RMI) on the Nifty Small Cap also suggests a near-term bottom may be forming. When the RMI drops to 10 percent or less, stock uptrends have been observed in the past.
Foreign institutional investors (FIIs) have continued to sell for the tenth consecutive week, offloading Rs 8,430.77 crore worth of equities. Additionally, derivative markets have shifted from long positions to short positions in index futures. A high short position indicates an overdone correction, potentially leading to a short covering rally in the coming days.
The benchmark indices ended the week with marginal declines, while smaller stock indices saw positive closings. IT stocks experienced selling pressure throughout the week, resulting in a three percent decline. The Telecom, Realty, and Healthcare sectors performed well, gaining over 2.5 percent. Metals and Capital Goods closed the week with a two percent increase.
September proved to be a challenging month for global equities, with major US indices posting their biggest monthly percentage drops of 2023 and all three US indices declining for the first time in 2023. MSCI stocks worldwide experienced a 4.3 percent decline, the largest monthly drop in a year. Rising bond yields have also influenced the currency market, resulting in the US dollar’s biggest quarterly gain in a year.
Overall, investors should keep an eye on smaller stocks for potential momentum buying, while larger stocks such as Aurobindo Pharma, Apollo Hospital, Eicher Motors, ONGC, SBI, and Sun Pharma may experience buying interest. Opportunities for low-risk buying are also present in stocks such as HUL, Asian Paints, Ambuja Cement, Infosys, and JSW Steel.
Source: Goldman Sachs Research, web.strike.money