Nifty to witness a sharp gap down opening on Powell’s aggressive stance

Bears will come back with vengeance on Monday, as the US Fed signalled its preference on controlling inflation over growth. The SGX Nifty at 17,270 indicates at least 380 points gap down opening as Nifty futures closed at 17,653

The US Fed Chief's hawkish statement at Jakson Hole symposium shook the equity market worldwide. In cues for major central banks across the world, Fed Chair Jerome Powell said that inflation is likely to remain higher for a longer period thereby requiring aggressive stance.

Read also: Powell’s surgical strike on interest rates ‘pivot’ expectations

‘Ultra Hawkish’

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said Powell sounded ultra hawkish in his brief speech at Jackson Hole. The Fed chief warned of "some pain" ahead in the economy. "This is an indication that the rate hike in September can be large, even 75 bps in September, even though he reiterated that the decision would be data driven. Markets will be concerned about the tight monetary conditions persisting longer than expected. The near-term impact on equity markets will be negative," he added.

Aishvarya Dadheech, Fund Manager, Ambit Asset Management, said: The US Fed has reiterated the fact that inflation targeting will be their primary objective. Most likely the Fed will pull out a third consecutive 75 bps hike in their September meet. Only new insight which came out of this speech was the Fed’s acceptance that economic growth might be compromised over inflation.

Following this, the US stocks crashed over 3 per cent on Friday. The US futures are ruling negative in early deal on Monday, indicating bears are here to stay for some more time. Stocks across Asia-Pacific are also down in the range of 2-3 per cent.

"Nevertheless, the market was already discounting this hike and was not expecting any reversal in their policy normalisation stance any time soon. With initial signs of the US economic data showing signs of deterioration (weak housing sales, PMI data, etc), it will be interesting to see how far the FED can stay on hawkish ground," he added.

‘FIIs rolled over shorts’

According to Ruchit Jain, Lead Research, 5paisa.com, "If we look at the FII’s data, they have unwound long positions and have rolled over bearish bets to the new series with just 35 per cent long positions and 65 per cent short (from August to September series). This indicates that most of the long rollovers are from retail traders, he said and added the dollar index has seen a resumption of its uptrend which does not bode well for the emerging markets.

Also, the momentum readings on the daily chart have given a negative crossover on the daily chart. Looking at the above factors, the upside seems to be very limited in the near term and if we break the ’20 DEMA’ which is now placed at 17,418, then lot of these long positions which have been rolled from August to September series could see unwinding.

After the Fed move, the RBI will most likely take one another rate hike in their next MPC meet, before settling to see the impact on economic indicators, said Aishvarya. The Indian market has largely discounted this hike by RBI and the Fed. What matters now, more than rate hikes, is the tapering of central banks' bloated balance-sheets, he added.

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