Is the bear market for Stocks over?

The US Market’s recent rebound has gained investor and analyst attention. Confidence is gradually seen seeping back into the US market. Some investors seem to be more convinced that the US economy will be able to avoid a severe downturn even if it copes with high inflation. In the last one-month benchmark index S&P 500 has grown by ~12%, NASDAQ-100 by 17.09%, and NASDAQ Composite by 17.25%, respectively.

Factors that influenced the US Market:

1. The shift in the market mood was somewhat driven by the data released by BoFA Global Research on 12 August 2022. The Tech stocks showed their largest inflows in nearly two months over the past week.

2. In the last one week, S&P 500 index inched 3.26%. The index has been on the track of delivering gains for its fourth consecutive week.

3. Another major factor influencing the US market was the release of the consumer price index (CPI) and producer price index (PPI) inflation data. The CPI and PPI data were lower in July 2022         compared to June. The market welcomed the lower-than-projected data, which pushed the market up last week. However, inflation is at the higher end. The data cheered the investors last week.

4. The lower inflation data announced last week was driven by lower energy and fuel prices. US gasoline prices dropped nearly 8% and WTI crude by almost 11% in the previous one month.

5. Commodity and energy prices lowered in recent weeks, driven probably by the increased oil supply and the problem related to the supply chain getting resolved gradually.

How does US inflation data impact other economies?

The rate of inflation in a country has a significant impact on the value of the currency of a particular country as well as the rate of exchange of the currencies of the two countries. According to the IMF, the US dollar is the world’s most popular currency and makes up more than 60% of all recognised central banks’ foreign exchange. Thus, this makes the currency a de facto global currency. Next to the US dollar is the Euro which makes up ~20% of the foreign exchange reserve.

Inflation and interest rates are closely linked to each other and can have a direct impact on the exchange rate. The relative strength of the US economy supports the value of the dollar. Thus, makes this currency powerful. In the foreign exchange market, the US dollar rules. Around 90% of the trade happens in the US dollar. Around 40% of the debt is issued in US dollars. As a result, foreign banks need huge dollars to conduct business.

Why does CPI matter to the currency trader?

The CPI data is considered important in the currency market as it impacts the decision made by the central banks regarding the monetary policy. The central bank of any country has the potential to control inflation at a suitable level. Policymakers raise or lower interest rates to achieve certain target levels. In case of any fluctuation in the target levels, it is possible that central banks may make some changes in the interest rate.

How does inflation impact interest rates and exchange rates?

Any change in the interest rate impacts the value of money. When inflation increases, the money in the economy tends to depreciate compared to other currencies. Also, any country’s central bank feeling inflation may increase the interest rate to lessen the impact of rising prices, which could counteract and strengthen the currency.

How interest rate impacts the trade relations of two countries?

Due to inflation, prices and costs in any nation go up rapidly. The goods produced in the country become more expensive than those made in other countries. With the rapid increase in the price in a particular country, people within the country and people from the rest of the world buy less of that product. Instead, they look for a similar product from other countries. As a result, imports are encouraged by people within the country, and exports are discouraged.     

How inflation impacts the stock market?

While discussing this topic, we should be aware that the relationship between inflation and stock price is not so simple, and there is no fixed rule to be applied. Hence, it requires deep research while picking stocks.

For stock investors, shares can act as a hedge against inflation in the long term. Market participants can see that their share portfolio can appreciate over an inflationary period.

Factors that influence the ASX?

The ASX is influenced by various factors like interest rate, exchange rate, government policies, overseas financial markets, and the stocks listed on exchange. The index has delivered a negative YTD performance of 5.11% due to factors like the Russia-Ukraine war, inflation rate, etc. However, in the last one month, the index has delivered a return of 6.83%. Thus, indicating a positive investor sentiment in the market. Further, many ASX-listed companies have started announcing their financial results. Thus, we can expect market conditions to improve in the coming days.

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