Factors that will trigger mood swings in the market

“Sell in May and go away” is one of those popular market proverbs that is tossed around every year, so May is practically over and with June nearly upon us, the greater part of the markets around the globe are up and Indian benchmark indices are witnessing an astounding rally and registering gains of over 4 per cent in the month of May, putting the aphorisms of ‘Sell in May and go away’ in question.

The benchmark indices rose over 5 per cent in the last week of May, making it the best weekly performance since March. Indian corporates reported their best set of quarterly earnings in the past few quarters in the January-March period. The game changer was the performance reported by Larsen and Toubro which set up a splendid show on the bourses, scoring up the greatest intraday gain in five years after the company beat the street expectation on all the counts, followed by better performance by India’s third largest IT Company Tech Mahindra and India’s largest bank State Bank of India (SBI). Also the AQR (Asset Quality Review) seems to be indicating a clear bottoming of the NPA cycle.

Past is past; and what is vital is to know the future events which are prone to keep the market on its toes. So in this report we have covered the triggers which are likely to drive the markets in the month of June. Extensively, the key triggers will be the RBI credit policy, Monsoon set up in different parts of the country, FED interest rate announcement and the Vote of BREXIT. Let us see how each of these events could pan out and what could be the probable impact of these events on the Indian markets in the month of June.

1.       Rate cut or no rate cut by RBI

The first important event which will keep hustle & clam our going in the Indian Benchmark indices is the monetary policy review of the Reserve Bank,which is scheduled on June 7, 2016. The key numbers to watch out for will be the CPI inflation, which has moved up sharply from 4.83 per cent in the month of March to 5.39 per cent in the month of April, which was higher than expected. Analysts polled by Reuters had expected April retail inflation to be five per cent and Bloomberg survey had expected 5.05 per cent. The major contribution has come from food inflation which rose to 6.32 per cent in April against 5.21 per cent in March and 5.11 per cent in April last year. Taming food inflation is also largely dependent on the monsoons, and hence, the RBI governor may choose to hold back on rate cuts till there is complete clarity on the Monsoons. Viewing the CPI inflation expansion,the market participants have factored a strong likelihood of a status quo, and hence, not cutting rate will not be too disappointing. However, what could be important are the direction and the guidance provided by the RBI that will eventually decide the fate of the markets.

2.       Will Rain God shower its blessings?

After witnessing two consecutive years of deficit rains, India is anticipating a decent rainfall this year. This big question emerges will India finally put a full stop to the drought cycle. Early signs give some insight that the El Nino might offer path to the much cooler La Nina. That implies India could get above average monsoons this year, as has generally been the situation in La Nina years. La Nina has been positive for weather, rains and for cropping patterns and could result in a bumper crop. That would, to a large extent help in cooling off food inflation. Be that as it may, these forecasts if workout will go about as a major help for Indian Economy and in turn will be reflected on the stock market.

3.       BREXIT might be an unavoidable issue

Britain goes to vote on exit from EU on June 23, and it could have bigger consequence for the EU region, which is about 25 per cent of the global GDP. Indian corporates are particularly worried about the purported BREXIT vote since Indian organisations have been expanding their investment in the U.K and Indian companies were the third-largest source of foreign direct investment for the island nation, according to the latest report from the British government. If the U.K decides to leave the EU and loses free access to the European market, that would create significant vulnerability for Indian organisations with a substantial exposure to UK Euro earnings. At present, vote is isolated and the markets will prefer a no change vote on June 23.

4.       US FED could decide markets

The likelihood of a rate hike in the month of June was supposed to be low. At least till Janet Yellen put forth her rate trek expression on May 26. Worldwide bond yields have responded pointedly upwards and this clearly hints that markets are expecting a rate hike in the month of June. The first rate hike which was done in the month of December, 2015 in nearly 10 years is still crisp, which resulted in $12 trillion worth of worldwide riches being wiped out. Developing markets like India are likely to be hit by a rate hike as portfolio flows will flow back to economies with better risk-balanced returns. This will have a short term impact on the developing markets.

The above mentioned events will set in the volatility in the Indian benchmark indices, hence, traders and investors should mark these event days in the calendar and trade accordingly.