Last week, the downgrade of the US sovereign ratings was the dominant theme across the markets globally.

The downgrade of the US to AA+ from AAA sparked a risk-off sentiment, weighing on stocks, bond prices, and emerging market currencies.

Most investors in equity took that as a chance to book profits. The broader view is that Indian stocks will continue to rise as period corrections for taking profits were a healthy sign of a bull run.

Morgan Stanley lifting India to overweight bolstered the sentiment.

The 10-year yield touched 7.20% last week due to the continued rise in US treasury yields. While that was the most cited reason, there is a fear in some corners that the Reserve Bank of India, worried due to food inflation, may announce a surprise hike in interest rates.

The consensus, however, is that the MPC will announce a hawkish pause yet again this week, while fears of a hike in this round or the next are creeping up as inflation for July is expected to breach the RBI’s tolerance band and print around 6.5%.

All eyes will be on the RBI this week.

Indian Markets Last Week:

Stocks rose on Friday, but the rise was insufficient to prevent the indices from posting weekly losses. Shares of IT companies, which had been weak after the quarterly earnings, bounced back on Friday. The sector gained over 3% this week. Pharma companies rose after reports said marquee PE firms like Blackstone are in talks to buy the promoter stake in Cipla. Banking shares fell on Friday.

Government bond yields rose again this week. The sharp rise in US yields triggered the up move. The benchmark 10-year touched 7.20% and is expected to increase even more unless the RBI surprises the market with a softer tone at its monetary policy review next week. Many fear the RBI will sound more hawkish than it did in the previous two meetings, as food inflation is proving to be worrisome.

The rupee fell sharply this week because of risk-off gloom set in emerging markets after rating agency Fitch Ratings downgraded US sovereign ratings to AA+ from AAA, citing deterioration in deficit and debt metrics. The RBI supplied dollars to prevent a sharper fall. Oil companies bought aggressively as the oil cartel leader Saudi Arabia announced it was extending its production cuts.

Global Markets Last Week:

IT companies’ shares also had a telling effect on US shares last week. Stocks fell after Apple disappointed with its sales numbers for the quarter. But Amazon came in with a rescue act with its estimate-beating growth in the cloud business. Sentiment soured after data showed the US labour market was slowing but at a slower-than-expected pace, thereby keeping Fed rate hikes on the table. Incidentally, Apple’s market cap fell below the $3 trillion mark.

Treasury yields fell sharply on Friday but closed the week higher, still smarting from Fitch’s downgrade of the US rating by a notch to AA+. Yields fell sharply before the market closed for the week as the US added fewer jobs in July than economists expected. The data was consistent with the trend of the past few months that showed job growth was slowing but at a gradual pace despite the steep interest rate increases by the Fed.

The US dollar fell sharply on Friday, erasing most of its gains during the week after Fitch’s action. The fall came after jobs data was softer than expected. But some aspects of the data, such as wage growth and unemployment rate, suggested the market was still tight, warranting continued hawkishness from the central bank.

Corporate Bonds

Bond Issuances Of The Past Week

Secondary Market

Yields remained unchanged across tenure last week due to a lack of fresh cues. Secondary market trade volume improved as insurance companies turned buyers and primary dealers were selling.

Outlook For This Week

All eyes would be on the RBI’s monetary policy statement due on Aug 10. The 10-year government bond yields could test 7.25%, especially if the US yields continue to rise. Indian stocks could resume the rise on the view that the much-needed profit-taking did take place. The rupee will move in a narrow range with a bias to weaken. The RBI’s hand will prevent the Indian unit from rising or falling sharply from the present levels.

In Other News

• India Jul e-way bill generation 87.95 mln vs 86.05 mln in June.
• No import ban, companies can import laptops, tablets, etc: Meity secretary.
• S&P Global sees India's GDP growing 6.7% a year on average till FY31.
• Morgan Stanley upgrades Indian equities' rating to 'overweight'.
• Blackstone sets its sights on buying out Hamieds from Cipla.
• Bank of England raises borrowing costs to 15-year peak, signals rates to stay high.
• India Jul composite PMI 61.9 vs 59.4 in June.
• RIL gears up to produce green hydrogen in two years.
• Fitch move spotlights US debt risk as recession fear fades.
• Fitch downgrade 'entirely unwarranted' amid US economy's strength, says Yellen.
• Apple heads for the largest third-quarter revenue drop since 2016 as iPhone sales slow.
• Govt hikes windfall gains tax on diesel exports, domestic crude oil.
• GST collection rose 11 per cent to over Rs 1.65 lakh crore in July.
• NSE eyes longer trade hours, small brokers likely to suffer.
• IMF raises global growth forecast, food supply concerns emerge.
• ECB's Lagarde says latest growth data 'encouraging'.

News Events This, Next week

• Aug 7: US Federal Reserve Governor Michelle Bowman speaks.
• Aug 8-10: RBI MPC's third meeting for monetary policy for 2023-24
• Aug 8: US Federal Reserve Bank of Philadelphia President Patrick Harker speaks.
• Aug 8: US Federal Reserve Bank of Richmond President Thomas Barkin speaks.
• Aug 8: US API Weekly Statistical Bulletin for August 4 week.
• Aug 9: US EIA Weekly Petroleum Status Report for August 4 week.
• Aug 9: India M3 Money Supply for July 28 week.
• Aug 10: Release of RBI MPC review.
• Aug 10: US Weekly Export Sales.
• Aug 10: US CPI for July
• Aug 11: US PPI for July.
• Aug 11: India Industrial Production for June, by NSO.
• Aug 14: CPI (combined) for July, by NSO.
• Aug 14: WPI for July, by Office of the Economic Adviser.