Global Equity markets declined by about 2.3% over the week. The decline was broadbased across all regions. Record high oil prices as well as weak economic data dented the sentiments during this week. US markets declined by 3% as oil prices and fears of further large writedowns by financials negatively impacted the market. Outlook for European market has also turned weaker as the economic fundamentals are set to deteriorate markedly. EM markets continued to decline (down 2.3%w/w) as rising inflation expectations dented investors’ sentiments. Within EM, EMF Asia declined the most, down -3.8%w/w. Pakistan was the best performing among EMs, while Columbia was the worst performing market. In India, the market declined more than 5% due to global cues and persisting FII selling. The market did recover from its initial reaction to aggressive RBI move to raise CRR and Repo by 50 bps on Tuesday but failed to sustain the gain. Friday the market lost around 4% following the global meltdown starting at US on Thursday. Banking, Realty, Auto, Metal and Capital Goods sector were worst hit and lost 8-10%. Persistent high inflation along with deteriorating economic fundamentals in India as well as globally will continue to put pressure on equities over the next few weeks.

Global Credit markets remained weak as rates trend higher across markets on fears that central banks will have to react to rapidly rising inflation expectations. The ten-year US Treasury declined a tad below 4% as Fed kept policy rate unchanged. In India, bond prices continued to remain under pressure due to high inflation and expectation of further monetary tightening. The benchmark 10-year gilt 8.24% 2018 yield rose to 8.6%. The elevated inflation, Rs 10,000 cr Govt auction coming Friday and liquidity constraints is expected to push the yields further upwards in coming weeks.

Currencies: The trade-weighted dollar moved sideways initially and then declined, caught between the capital flow offsets from rising rates and falling equities and credit. Meanwhile, the INR gained against USD but depreciated against other major currencies. Though RBI is hawkish, sharp rebound in INR is still unlikely due to possible widening of current account deficit and reduced capital inflows.

Commodities: Crude oil reached new highs because of supply disruptions and weak inventory conditions. Precious metals outperformed due to inflation concerns. Copper advanced on cash buying, while other industrial metals declined. Slowdown in global growth will lead to across the board softening in commodities (except agri and few metals which have significant supply constraints).

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