It’s time for caution as bond yields reverse
Not really! Here’s where another hurdle in the process comes into the picture. The falling bond yields.
In the past few days, Silicon Valley Bank and two other banks have gone bust due to the steep increase in interest rates. Worldwide banking shares have witnessed sharp plunges on the street.
This has caused investors to take a flight of safety as they have flocked to the bond market resulting in high bond prices. Bond prices and yields are inversely correlated. The past week has seen an approximately 12% drop in the US 10-Year Government Bond Yield.
This is the biggest fall since the 2008 crisis, sending shivers down the spine. The economic and banking turmoil is enough to scare investors out of the equity market as evident in the recent fall of major indices.
This is where the FOMC meeting next week becomes even more interesting. The expectation for a rate hike has been revised from 50 bps to 25 bps post the Silicon Valley Bank collapse. The anticipation has deepened to no rate hikes as more banks collapsed.
Sharp falls in bond yields have led to sharp falls in equity markets too. You can notice the last two sharp falls in bond yields which coincided with sharp cuts in S&P 500.
Coming to Indian equity markets, they are expected to remain under pressure. If we take a look at the 200 weekly moving average of Nifty50, it is considerably lower compared to its stock price. The 200-Weekly Moving Average is close to 15,000 levels currently as against the Nifty50’s current market price of ~17,000 levels.
Every time the price has surged above the 200-Weekly Moving Average, it has come back to its mean. The pattern presents itself every few years where the price makes space from its mean. Eventually, it meets the average back with a heavy downfall.
The current situation of declining US bond yields could be a triggering point for the markets to revert back to their mean.
In the last couple of weeks, markets practically saw a one-sided selling activity which completely change the texture of the market sentiment to bearish. Nifty broke its past 7 weeks’ consolidation range and closed at 17,100 levels with a loss of 1.80% on the weekly closing basis.
The 50–week exponential moving average which was acting as a support level has been breached this week and the price closed well below its average. The trend looks negative as the momentum oscillator RSI (14) has broken below its previous support levels and presently reading in a lower low formation with a negative crossover on the cards.
The daily chart index has formed a bullish ABCD harmonic pattern at 16,850 levels and in addition, a positive divergence is also spotted which indicates the probability of bounce back at current levels. The bounce back can be short-lived as prices may face strong resistance at higher levels.
Technically the structure has turned bearish and Nifty stands at the strong polarity support of 16,800 – 16,750 levels, failing to hold which the index is likely to see a further correction towards 16,450 – 16,400 zones. Only a sustained close above the 17,300- 17,350 zone is likely to trigger bullish momentum toward 17,500 – 17,550 levels or even higher.
Expectations for the week
The coming week is scheduled to hold its first FOMC meeting after the collapse of three banks. While inflation saw a dip, it remained uncomfortably higher than the tolerance band. This has initially raised murmurs of a 50 bps rate hike, the current bank dynamics might change the same. Therefore, this meet will be closely watched as market participants try to read between the lines regarding inflation, GDP and unemployment. At the moment, global markets will continue to remain vulnerable to any macroeconomic shocks. Meanwhile, Indian markets, just like their global peers will trace the steps according to the global market scenario.
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