Global shares eased on Tuesday as investors reassessed the US economy’s resilience, with weakening manufacturing activity pushing the dollar to multi-month lows.
In India, share markets experienced sharp sell-offs after early vote counts indicated that Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP)-led alliance might not secure the predicted landslide victory.
The dollar reached its lowest level in over two months against the euro and the pound. US government bond yields have also declined over the past six weeks as investors increasingly believe the slowing economy may prompt rate cuts this year.
The MSCI All-World index fell 0.2%, while European stocks paused, pushing the STOXX 600 down 0.5% after four days of gains.
US stock futures, specifically the S&P 500 e-minis, were down 0.2%, indicating a modest decline at the Wall Street open. Wall Street ended mixed on Monday due to soft manufacturing data and a glitch on the New York Stock Exchange that briefly halted trading in several stocks.
Indian equity markets saw volatile trading, with vote-counting suggesting Modi’s party would win a majority, though smaller than exit polls had suggested. A Modi victory was expected to positively impact financial markets, spurred by hopes for further economic reforms. The Nifty index dropped 8.5% before recovering some losses, while the BSE index fell 5%. Both indexes had reached all-time highs on Monday.
Mark Matthews, Head of Research Asia at Julius Baer, commented on the recent decline in Indian markets, down 5.5% and dipped as much as 9% earlier. The market reaction is attributed to the initial election results, which diverged significantly from exit poll predictions. Matthews noted that around 100 seats have margins of less than 10,000 votes, leaving room for substantial changes as the final tally, expected by 5-6 pm India time, approaches (it is currently 1:30 pm there).
“But for now, it appears the incumbent National Democratic Alliance (NDA) will get around 295 seats in the 543-seat Lok Sabha (lower house),” he said. “That is above the 272 seats needed for a majority but below the 353 seats the alliance got in 2019, below the exit polls’ estimate of 350-370 seats, and far below Prime Minister Modi’s estimate of 400 seats.
“His estimate was probably bluster meant to show his BJP party didn’t need partners to win. Which has proven incorrect, because without its partners, BJP would likely lose this election.”
Within the NDA’s projected 295 seats, the BJP is expected to win only 240-250 seats, a decline from the 303 seats it secured in 2019 and below the 272-seat majority requirement. Matthews noted that the party’s weaker performance is primarily attributed to rural areas in the populous northern Uttar Pradesh, Maharashtra and Rajasthan.
He reckons that the result will not change earnings growth for this year, which should be 12-15%. Nor does it undo the previous reforms that created the momentum and energy in the economy today. In the January-March quarter, the economy grew by 7.8% year-on-year. A 10% correction would bring out enough buyers again to put in a bottom, i.e. approximately 4% from here.
US and Europe
This week brings significant data releases, with the strength of the US labour market in focus. The Job Openings and Labor Turnover Survey (JOLTS) is due later on Tuesday, and non-farm payroll figures for May are out on Friday.
On Monday, US Treasury yields fell to their lowest in two weeks as manufacturing activity slipped for the second consecutive month in May. The yield on the benchmark 10-year Treasury notes fell two basis points to 4.381%, while the two-year yield, sensitive to Fed rate expectations, fell one basis point to 4.8058%.
In Europe, investors expect the European Central Bank to cut the benchmark rate by 25 basis points to 3.75% on Thursday.
The dollar fell 0.4% against the yen to 155.39, near its two-week low and nearly 3% down from late April’s multi-year high of 160.03. The euro was down 0.2% at $1.0881, gaining 0.65% over the month. The dollar index, which tracks the greenback against a basket of other major currencies, held around 104.
US crude fell 1.8% to $72.88 a barrel, while Brent crude dropped 1.6% to $77.10. Both benchmarks hit four-month lows on Monday after the Organization of the Petroleum Exporting Countries and allies (OPEC+) agreed to start unwinding some production cuts from October.
Gold edged slightly lower, falling 0.6% to $2,335 an ounce.
