The domestic benchmarks, the BSE Sensex and the NSE Nifty, are set to open sharply lower on Monday, following weak cues from Asian peers as investors feared that higher-than-expected U.S. inflation could prompt harsh actions by the central banks ahead. Shares in the Asia-Pacific region were flashing in red, led by regional heavyweights Japan and Hong Kong, which dropped nearly 3% in early trade. The negative trends on SGX Nifty also indicated a gap-down opening for the domestic bourses, with SGX Nifty futures trading 320 points, or 2%, lower at 15,864 on the Singapore Stock Exchange at 7:15 AM.

Going ahead, the equity market would be dictated by May inflation data and the U.S. Federal Reserve’s interest rate decision due this week. Among others, foreign fund flows, the trend in crude oil prices, and the Covid-19 infection rate would also set tone for the market.

Last week, the 30-share Sensex dropped 1,466 points, or 2.62%, to end at 54,303 levels during the week ended June 10. Similarly, the 50-share broader index Nifty settled 269 points, or 1.63%, lower at 16,202 levels. The equity market witnessed volatile trade last week with concerns about inflation and rate hike by the Reserve Bank of India triggering a sell-off in the market. On Friday, the Sensex crashed 1,016 points to 54,303, and Nifty plunged 276 points to 16,201, led by losses in index heavyweights such as Bajaj Finance, HDFC, HDFC Bank, Reliance Industries, Wipro, Infosys, Tech Mahindra, Tata Steel and TCS.

Here are 7 factors that will set the tone for the market this week.

U.S. inflation data

The U.S. inflation rate surged to a four-decade high of 8.6% in May 2022, bolstering the case for an aggressive rate hike by the Federal Reserve. As per the data released by the labor department on Friday, the consumer-price index increased to 8.6% in May, hitting the highest level since December 1981, driven by spurt in energy and food prices. Weighed down by the concerns that the Fed will raise its key short-term interest rate by half a percentage point, the S&P 500 tumbled 2.9% to extend its losing streak for the ninth week in the last 10, while the Dow Jones Industrial Average and the Nasdaq composite dropped 2.7% and 3.5%, respectively.

U.S. Fed meeting

With inflation hitting a record high in May, U.S. central bank officials are slated to continue their aggressive policy stance to curb rising costs. The U.S. FOMC (Federal Open Market Committee) is scheduled to announce a monetary policy decision on June 15, and the market is expecting the central bank to raise the rate by 50 basis points amid an inflation monster.

India's retail inflation

India's retail inflation is likely to stay well above the Reserve Bank of India's upper tolerance limit for a fifth straight month in May amid higher fuel prices and food costs. According to Reuters poll of economists, the consumer price index (CPI) is likely to slip marginally to 7.10% in May on a year ago, from 7.79% in April, on the back of government's fuel tax cuts and ban on exports of sugar, wheat, and other commodities to bring down food inflation. CPI headline inflation rose further from 7% in March 2022 to 7.8% in April, reflecting broad-based increase in all its major constituents.

In the policy meeting last week, the Reserve Bank of India further raised its inflation target for the financial year 2022-23 to 6.7% from 5.7% earlier on the back of rising crude oil prices. The restrictions on wheat exports should improve the domestic supplies but the shortfall in the rabi production due to the heat wave could be an offsetting risk, the RBI had warned. RBI’s projections indicate that inflation is likely to remain above the upper tolerance level of 6% through the first three quarters of 2022-23.

IIP data

Industrial output, measured through Index of Industrial Production (IIP), hit an 8-month high of 7.1% in April, according to government data released on Friday post-market hours. This comes after the meagre 1.9% industrial growth seen in March. The sharp growth in industrial production was led by higher electricity and mining output.

In absolute terms, the quick estimates for the index of industrial output stood at 135.1 for April 2022, compared to 126.1 seen during the corresponding month of last year, but lower than 148.8 in March 2022.

Sustained fund outflows by FIIs

The foreign investors continued their selling spree in Indian equity markets and pulled out around ₹14,000 crore this month so far. Overall, the net outflow by foreign portfolio investors (FPIs) from equities touched ₹1.81 lakh crore so far in 2022, data with depositories showed. In the debt market, FPIs also turned net sellers and withdrew a net ₹600 crore during the period under review.

Crude oil

The trend in global crude prices will also set tone for the equity market this week. On Friday, Brent crude, the global oil benchmark, closed near a three-month high $122 per barrel as investors weighed the European Union’s decision to partially ban Russian oil imports as well as Saudi Arabia’s recent decision to hike oil prices.

The crude prices have remained elevated in the recent past amid global supply chain disruptions caused by Russia’s invasion of Ukraine in late February, which raised upside risk to inflation and prompted central banks globally to hike interest rates.

Covid-19 cases

As India witnessed a sudden rise in Covid-19 cases, there is fear of the fourth wave in the country. The daily infection rate breached the 8,000-mark with 8,329 new cases reported on Saturday. India’s active case count surged to 40,370 marks, while the daily positivity rate rose to 2.41% on June 11, showed the data.

India faces a fourth wave scare as neaighbouring China is experiencing an "explosive" Covid-19 outbreak, which forced authorities to re-impose fresh curbs in several cities in China, a week after it eased restrictions.

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