The markets have gained despite war, disease, rate hikes and recession fears thrown at them. This piece seeks to analyse what’s going right for the markets and what may challenge them, going forward. First the positives: Indian indices have gained for the second straight week. Foreign investors, after being massive sellers through March, bought a handy $370 million of shares on Friday. Their return to India is in step with the bounceback of risk assets world over. Last week, both the US and European markets saw their best weekly returns since 2020. Helping the sentiment was the fall in crude oil prices for the second straight week even as commodities from copper to coal saw a good 10-20 percent cool off in prices. The Nasdaq is now nearly 10 percent above its early March lows, while the Nifty is nearly 9 percent off its post-Ukraine lows.

The prime reason for the bounceback is the correction from oversold levels. No matter what the fundamentals, when the CBOE VIX ( the volatility index or the fear gauge) hits 35, the markets are in heavily oversold terrain and a bounceback is usually likely. Speaking of fundamentals, the market has had three big worries: 1.
the war, 2. the resurgence of Covid and resultant lockdowns in China and East Asia and 3. the Fed’s tightening schedule.
Currently, the big positive for the market is that the negatives are known. The market has somewhat gauged the worst that can happen to prices, inflation and growth due to the war. The assumption it is making is that crude prices won’t get past $130/barrel again. Secondly, it is believing what the WHO is saying about the latest Covid wave: that it is milder and hitting countries with more ageing populace and those that haven’t gone through widespread infection like India went through last May with delta and in January with Omicron. Finally, the market appears to have fully discounted the seven rate hikes that the Fed indicated this year plus the three next year.

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