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Macro Headwinds Weigh On Market Sentiment, US Fed Decision In Focus

(Attributed to: Ankita Pathak, Head – Global Investments, Ionic Asset)

Macro headwinds remain elevated for equity markets across the world, with commentary from Anthropic's CEO further adding to the risks that the markets are currently facing. The next key catalyst would be the Fed’s policy decision on 16th September midnight, with markets largely pricing in a 25-bps rate hike. We believe a hike would provide policy certainty and maintain Fed’s credibility. We have not changed our long-term global asset allocation view, maintaining a 70:20:10 allocation across Equities, Commodities and REITs/Fixed Income. An expected BoJ rate hike could limit further upside in the DXY and provide some support to commodities and EM assets. Most of the portfolios have been AI-fied, from EMs to commodities, all are essentially linked to data centres, therefore, we reiterate the importance of building appropriate portfolio diversifiers. While the long-term fundamentals remain intact, macro overhangs have increasingly taken centre stage, with significant movements beneath the headline indices despite relatively stable index levels.

Global markets have come under pressure amid an increasingly uncertain and challenging macro backdrop, marked by persistent inflationary pressures, elevated interest rates and geopolitical tensions. Sentiment has been further clouded by concerns over a potential slowdown in the AI investment cycle, following Anthropic CEO Dario Amodei’s comments on the need to moderate the pace of AI development to ensure risk management keeps pace with technological advancement.

Brent Oil Price Uncertainty Lingers As Geopolitical Tensions Persist

Since the onset of the war, Brent oil prices have risen 45.8% and have remained above USD 100/bbl for five consecutive trading sessions, highlighting the potential macroeconomic fallout if elevated prices persist. From higher inflation and higher for longer interest rates to deteriorating trade balances and currency outlook for major oil-importing countries like India, seems closer to reality. Latest disruptions in the Saudi Arabia pipeline also highlight that the problem now is increasingly moving towards a supply issue rather than merely a supply-chain issue. The closure of the East-West pipeline has put more than 4 million barrels a day of crude oil export capacity as risk. With Saudi Arabia estimated to have only around 5–7 days of inventory cushion, any delay in repairs beyond this window could keep oil prices elevated and amplify the broader macroeconomic risks.

US Yields Remain Elevated, As Market Await Clarity On Monetary Policy

US treasury yields have been rising amid worries on account of both fiscal strain and rising inflationary pressures. The US 10Y yield breached 5%, highest level since 2007. Inflation in the US has remained above the 2% target for five years now, with markets continuously factoring persistent price pressures into yield movements. The upcoming Fed policy is expected to reduce the policy uncertainty and give a clear rate direction.

How Have Global Markets Fared Over the Last Week?

Rising expectations of higher interest rates have weighed on global risk sentiment, with DMs (-1.7%) outperforming EMs (-3.4%) amid a broad-based market sell-off. The DXY rose ~0.2%, while 10Y UST yields increased ~20 bps and gold declined 2.4%. The INR depreciated ~1.2% despite timely RBI intervention, reflecting continued pressure from elevated US yields and a stronger USD.

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