What will the rising dollar index mean for emerging markets like India?
Anurag Singh, Managing Partner, Ansid Capital, says “rates are going to be higher for a bit longer. The Federal Reserve last week clearly revised the dot plots and this time they are saying there are no cuts at least till the middle of 2024. If we put all this together, the picture is that when the rates are 5.5% with another 25 basis probably coming, can the markets be at 20x multiples? By the way, the entire rally was hinging on just seven stocks. That is also kind of coming back to roost.” What is this extended move on the dollar index for the last six days indicating? Traditionally we spell bad news for equities, especially emerging markets?
Yes, true.
I would say that these are relatively indirect indicators. The more direct indicators include the entire bond vigilantism market is undergoing. Moody's said that if this time there is a shutdown, they might again review the ratings.
The US government is issuing $10 billion of bonds every day. At some point, this tough conversation about the entitled expenses is needed. It is broadly about 55-60% of what the US government spends.
No party is willing to do that. In that scenario, it is unthinkable that the bond market will not get worried. And that is being reflected in the bond yields.
If that happens, it is ultimately bad for equity markets which also means that more money will flow into dollar bonds because they are paying so well and this ultimately pushes the dollar up. I understand that for the emerging market, these are the headwinds. But the US is not too safe either because again, there are questions around earnings.
