Withdrawal Symptoms

This is going to be painful

Apr 10

Central Banks are finally getting serious about withdrawing the emergency measures they had instituted during the pandemic. Inflation went from being “transitory” to “supply-chain related”, and is now on its way to becoming “embedded” with a layover in “Ukraine.”

It’s hard to know how much the U.S. Federal Reserve will need to do to get inflation under control. But one thing is certain: To be effective, it’ll have to inflict more losses on stock and bond investors than it has so far. Bloomberg

With $95 billion being “run-off” (where the Fed stops reinvesting proceeds from maturing securities) every month, and 50bps hikes being advertised, risk markets will likely experience severe withdrawal symptoms (FT).

On the domestic front, the RBI finally signaled that it putting inflation over growth and delivered a “stealth normalization” of its interest rate corridor (MC).

The bright spot is that equity inflows continue to be supportive.

According to BAML, weekly flows into US equities were +$1.5bn and EM equities were +$5.3bn. And new records are being set in India.

[year-on-year] Folios have grown 32%, while retail AUM has grown 38%. Retail investors have continued to repose faith in mutual funds as an investment vehicle despite some volatility even in March. - NS Venkatesh, chief executive officer at AMFI (BQ)

We’ll see tighter monetary policy interacting with flows over the next few months. Things are going to get interesting.

Markets this Week

The US long-end got smashed to bits while the Indian 10-years sold off after RBI’s shift in policy. Indian equities continued to recover and are within ~5% from their all time highs.