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The week was marked by weakness across equity markets. If the Dow created recent records by correcting for 10 straight days (unheard of since 1978), the Sensex was down around 4.5% this week. Not exactly a Santa rally. One of the things which hurt the market was a hawkish Fed (more on this just ahead). India high frequency data, and China data are both looking skittish. And while crypto and gold have been zooming, the Fed commentary brought the dollar in focus, with the mighty greenback winning against everyone post the Fed meet. Indian markets had pressure too, but the IPO market looked strong and the listings at large (Inventurus Knowledge, Mobikwik, Vishal Mega Mart) were strong and the new IPOs (DAM Capital and Mamata Machinery) saw decent subscription. Here's the set of key talking points this week.
The week was marked by weakness across equity markets. If the Dow created recent records by correcting for 10 straight days (unheard of since 1978), the Sensex was down around 4.5% this week. Not exactly a Santa rally. One of the things which hurt the market was a hawkish Fed (more on this just ahead). India high frequency data, and China data are both looking skittish. And while crypto and gold have been zooming, the Fed commentary brought the dollar in focus, with the mighty greenback winning against everyone post the Fed meet. Indian markets had pressure too, but the IPO market looked strong and the listings at large (Inventurus Knowledge, Mobikwik, Vishal Mega Mart) were strong and the new IPOs (DAM Capital and Mamata Machinery) saw decent subscription. Here's the set of key talking points this week.
More Hawkish Than Anticipated!
The Federal Reserve has spoken, and as far as investors are concerned, the message was clear — clearly hawkish. In as far as the decision goes, the FOMC cut rates by 25bps, as widely expected, with the target rates now a full percentage point lower since the Fed's rate cutting cycle started on September 18. But the Fed's updated Summary of Economic Projections was quite hawkish. Including the non-voters on the committee, the dot plot shows that four FOMC participants were in favor of not cutting the FFR this time around. Fed officials raised their median projection of where they see the long run neutral rate and also significantly raised their 2025 inflation outlook. Citi believes that the continued softening of the labor market is likely to become even more evident in coming months and the soft US labour market will keep the Fed cutting at a faster pace than markets are pricing. Citi expects a sharp dovish pivot from Powell and the committee in the next few months.
China Needs Its Consumers More Quickly Than Anticipated
China’s retail sales growth unexpectedly weakened in November despite signs of improvement in the housing market, highlighting the urgency for Beijing to further encourage residents to spend. Retail sales rose 3% from a year ago, the slowest pace in three months and undershooting even the most bearish of forecasts. Industrial output increased 5.4%, keeping momentum as the manufacturing side of the economy continues to outperform consumer spending. If the consumer spending does not pick up shortly, it's a problem. Sajjid Chinoy of JPMorgan is cautious about the impact on China if indeed Donald Trump lives up to his billing of raising tariffs from 20% to 60%. The hope is, that a bilateral trade war does not become a regional trade war.
Slower Than Anticipated
Slow demand for passenger vehicles is being seen after the modest growth during the festive season, led by record discounts. Despite the year-end discounts being higher than the record-high festive discounts, dealers have been highlighting to brokerages like Emkay muted retails due to weak consumer sentiment and cautiousness among financiers. Consequently, despite the modest growth in wholesales (11% FY25YTD), inventory build-up with dealers remains at alarmingly high levels, further impacting the profitability for dealers (due to higher interest cost, dealer-discounting to clear inventory).
Hence, we believe margins of PV OEMs would come under pressure in Q3FY25E owing to the record-high discounts. I couldn't agree more, but Dr Anish Shah of M&M was of a different opinion. Notwithstanding the fact that M&M's sales are better than the rest, he believed that this is a temporary dip and he senses pent up demand, which might drive sales.
Crypto Acceptance More Mainstream Than Expected?
Bitcoin’s soaring value (aside of the recent correction due to dollar strength) has caught the attention of high-end fashion brands and retailers, prompting further interest in offering cryptocurrencies as a means of payment to tap in to fresh pockets of wealth and build loyalty with crypto investors. Until recently, only a handful of luxury brands including Louis Vuitton, Hublot and Tag Heuer had experimented with crypto payment offers. However, in recent weeks, upscale French luxury department store Printemps announced it was teaming up with the world's largest crypto exchange, Binance, and French financial tech company Lyzi to accept cryptocurrencies including Bitcoin and Ethereum in its stores in France — becoming the first European department store to do so. This is very different from an offbeat payment done for pizzas sporadically. This is the real deal. Reuters says that luxury lighter and pen maker S.T. Dupont aims to accept cryptocurrency payments in two Paris stores before the holidays. More mainstream? Or not really?
This week also had Donald Trump and his posts on various social media platforms, but that is something that may happen every week. Also, Accenture's guidance failed to light up the tech space. There was also a mad gold rush, which had a big impact on the trade deficit. But nothing to take attention away from Fedspeak, which had the biggest impact on world asset classes.
Till next week...
Niraj Shah.
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