September 18 marked the beginning of a significantly different economic era from what the US and the world, in general, have been acquainted with so far since 2020. The US Central Bank delivered the much-awaited interest rates cut by as many as 50bps while emphasizing the healthiness of the economy in general. The benchmark policy rates remained in the 5.25%-5.50% range for the last 14 months. The period, although significant, remains short of the 15-month steady-rate regime before the commencement of the global financial crisis during 2007-09. From what the Fed has indicated, there will be a further reduction of 50bps till the end of 2024. Chances are ripe that the Fed will be reducing rates additionally up to 150bps till 2026. Federal Open Market Committee meetings are scheduled on November 6-7 and December 16-17 later this year.

Impact on Indian Markets:

The rate-cut regime typically brings a significant upward trajectory in the equity markets, globally, although more pronounced, in emerging markets. Indian markets seem to have followed suit. Benchmark index Nifty50 has rallied close to 1.5% (more than 375 points) during the trading session concluded this week. On the same lines, the banking index, Banknifty, has rallied close to 1.4% (more than 750 points). The rally seems to be driven predominantly by interest rate-sensitive stocks. Index heavyweight HDFC Bank, which commands close to 28% of the banking index, gained 4.5% in the last week’s trading session. ICICI Bank gained close to 7.05%. This certainly vindicates the fact that the private banking sector which was undervalued, was awaiting a valuation uptick to facilitate a rally in the indices. The rally might extend till the end of this year because rate cuts will facilitate foreign inflow as the federal rates will stand close to ~4% by the end of this year. However, concerns still loom over the higher valuation of midcap and smallcap segments. The midcap index has risen close to 100% in the last 18 months & the smallcap segment more than 100%. The mid-cap segment maintained a healthy price-to-earning ratio of 20-22 from June 22 to March 24 with a healthy uptick in the earnings per share(EPS) during the same period. But the current multiple stands at 48 although not alarming, still poses a risk based on the EPS reduction of the Nifty Midcap-50 index since February 24. Hence, a broad-based correction in this segment is possible after Q2-Q3 results. The smallcap segment is more attractively priced than the mid-cap with a PE multiple of 36 while boasting an all-time high EPS. But, valuations might be a concern both in mid-cap and small-cap at this point for institutional investors. The segment that stands attractive in terms of valuation currently is Large-Cap. Sectors with favourable tailwinds that act as a natural hedge against uncertain volatility are Pharma, Banking and FMCG, all of which seem to be well-poised for long-term gains. As a result, institutions might favour those sectors.

Now moving from fundamental to technical aspects, the chart patterns show that the Nifty50 has broken resistance (a significant Fibonacci level) of 25,700 and is preparing for a rally till the next Fibonacci level of 26,290. Open Interest(OI) data for September month’s expiry shows a huge put option OI build at 25,500 strike price levels which might act as a support. The OI build for calls seems to be pronounced at 26000 strike prices. This level might act as immediate resistance and there will be profit booking at these levels. The large OI build-up for put options is also visible in October month’s expiry at 25500 strike prices which might indicate that option sellers vouch that the market might still stay some time above 25,500

US Markets:

Taking cues from the global market, the US Dow Jones and the tech-heavy Nasdaq showed healthy gains. Markets globally, seem to have positively factored in the alleviated concerns on recession. The latest report on US jobless claims (week ended 14th September) fell to its lowest and has exceeded expectations. This means unemployed Americans applying for benefits are at their lowest level. This might seem to indicate that the US Fed and policymakers have been successful in taming inflation and saving the labour market from deteriorating and while doing so, have demonstrated that the narrative of soft landing has been adhered to. A lot might emerge once the US presidential elections are concluded in November, as concerns have been raised on the “political motivation” for the rate cut and the “motive” behind it. If politico-economic interference leads to irrational exuberance in markets, a healthy correction is imminent.