By – Jawahar Mishra
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When agreements were reached to end the war between America and Iran, it seemed that everything would be fine. But as one crisis faded, another began to loom. On the very first day of the week, the US stock market was shaken, and subsequently, it jolted markets across the world.
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In reality, as soon as the US job data turned out to be positive, the Federal Reserve’s mood changed abruptly. Until a few days ago, there was talk of interest rate cuts, but due to strong job data and rising inflation, the Fed made it clear to abandon hopes of a cut; instead, interest rates might be hiked once this year. This single decision by the US Federal Reserve is proving to be nothing less than an earthquake for global markets.
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Expectations for relief in interest rates were pinned on the newly appointed Federal Reserve Chairman, Kevin Warsh, who is very close to US President Donald Trump. However, his future projections have spooked investors. Fearing high interest rates, foreign institutional investors have started pulling their money out of emerging markets and moving it into safe US bonds.
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Possibility of an Early Rate Hike
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According to Fed funds futures, the probability of a rate hike by September is being estimated at over 80%. Meanwhile, the Federal Reserve’s signal to keep interest rates high and global uncertainty have made the US dollar extremely strong, putting Japan’s currency, the Yen, in crisis, and exerting pressure on the currencies of Europe and Britain as well.
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On the other hand, the world’s richest man, Elon Musk, has suffered the biggest economic blow this week. His company, SpaceX, was listed last week and garnered much attention. But within a week, the company’s shares have performed poorly. After the listing, SpaceX’s stock reached $225 on June 16, which slipped to around $147 during early trade on Tuesday. This means one-third of the company’s market cap was wiped out in just a week. Moreover, in a single day, Elon Musk’s net worth declined by approximately $152 billion.
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A Big Jolt to Elon Musk
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What jolt did Elon Musk receive? Immediately after the listing, SpaceX announced the acquisition of the AI coding startup ‘Cursor’ in a $60 billion all-stock deal, which diluted equity. Immediately after this, a Bloomberg report surfaced that the company is planning to raise debt by issuing $20 billion in bonds. Financial documents revealed that SpaceX’s subsidiary, xAI, is suffering heavy operating losses. Following this, short-sellers and investors questioned the high valuation, leading to massive profit-booking in SpaceX, which soured the mood of the global tech market.
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The turmoil in SpaceX shares also shook the US stock market, and when the US stock market trembles, its impact is felt in global markets. On Tuesday morning, the South Korean market was left bleeding. A 10% lower circuit was triggered in South Korea’s KOSPI index. A 10% lower circuit in a major national index is no trivial matter. Although, in the last few months, a one-sided rally was witnessed in the Korean market.
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Notably, half of the KOSPI index depends on semiconductor and tech stocks. Foreign investors sold off shares worth more than 4 trillion Won in a single day, causing the sharpest decline in the shares of chip-making companies Samsung Electronics and SK Hynix. To stabilize the market, the exchange had to implement ‘sidecar’ and then a level-1 ‘circuit breaker’ to halt trading.
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Significant Impact on the Indian Market
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Market experts believe that the massive decline in the South Korean market was inevitable, as the bubble of high valuation created around AI and semiconductors over the last year had to burst at some point. The signals from the US Federal Reserve provided the perfect opportunity for it.
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The flames of this chaos in Asian markets reached the Indian stock market on Tuesday as well. The Indian IT sector was already under pressure due to weak revenue guidance provided by IT giant Accenture last week, and this global crisis acted like adding fuel to the fire. A selling atmosphere prevailed in the Indian market across the board. Following the trend of Nasdaq and KOSPI, a major decline was observed in Indian IT stocks. High interest rates always reduce the value of future profits for IT and growth stocks, leading to fears of further selling by FIIs.
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