US Fed Policy – Dovish Stance But Hawkish Undertone

It was supposed to be a make or break day for the global equities as US Federal was supposed to throw some Light on the speculation about the hike in interest rates and stoppage of bond buying. And as the announcement was to be made after close of Indian market hours, there was good amount of cautiousness seen amongst the traders. Amid this cautiousness the benchmark share indices ended higher yesterday, snapping two-day losses, after China announced fresh monetary stimulus and hopes that US Federal may continue with its low interest rate regime for a considerable time.

As a result the Sensex gained 139 points to end at 26631 and Nifty climbed 43 points to close at 7975. Among the broader markets, BSE Midcap and Smallcap indices underperformed the large counter parts and ended up 0.3% each. The market breadth ended slightly positive on the BSE with 1,532 shares advancing and 1485 shares declining.

While this was the scenario on the domestic front, as stated earlier the more focus on the announcement made by US Fed Chairperson -Janet Yellen. Again it was another seemingly make-or-break Federal Reserve day, with all eyes on the September policy meeting statement hints as to what's next for interest rates. However the US Fed has kept their language quite complicated keeping the investors quite confused. While there was announcement of another taper to the tune of USD 10 billion taking the monthly bond buying to USD 15 billion, there is no clear cut guideline being given on when the interest rates would be hiked. There is clarity on one fact that the Bond buying would end in Month of October as the Fed Meeting is scheduled in the last week of October.

As regards the interest rates, Yellen suggested that as the recovery in not yet full the hike in interest rates would be considered as and when there are some indications of full recovery. The best part is, the Fed has stayed with the phrase of ‘Considerable Time’ for rate hike remains. All in all one can state that overall policy stance seems to be Dovish. But we feel the undertone is quite hawkish as Yellen at press conference stated that that hike in rates would be more data dependent. This may keep the confusion on the street intact. Amid this the Dow closed with gains of 25 points or (0.15%) and S&P closed up by 3 points (Up 0.21%).

Asian markets are trading in green with Nikkei trading with gains of more than 1%. The depreciating Yen against the USD would be beneficial for Japanese exporters. Hang Seng and Shanghai Composite are however trading with losses of 0.70% and 0.11%.

SGX Nifty has however opened in red with loss of 0.35 % owing to the fact that easy liquidity to emerging markets may dry up soon.  We feel it would only a short term impact as long term funds would continue coming back to India. Rather the recent deals with China and Japan are expected to bring in more than USD 135 billion to India. As of today, we expect the Indian equities to open on a negative note. However value buying is likely to help the indices recover in late trade.