Moody’s upgrade, stable currency, a current account surplus after long, yet another failed dharna – all joined hands to give the stock market, its most impressive rally in ten years. The KSE-100 benchmark index briefly touched 41000 on Friday, before closing down a shade under – marking a remarkable recovery from the lows of 28764 in August 2019 – an upside of 42 percent.

The weekly market commentary by brokers, Arif Habib Limited (ALH), pointed out last week as the seventh consecutive positive weekly return. The 22 percent return in just seven weeks is the highest such return since September 2009. AHL pins it down to improving macros and lower bond yields, which fell down to under 11 percent for 10-year PIB, as per the latest auction.

The valuations are certainly opening up, and the market seems to be building hope towards a reversal in monetary cycle, by as early as January 2020. The latest inflation numbers, showing CPI north of 12 percent, may raise some eyebrows, but the market must have taken heart from the PIB auction yields, which have come down. The ideal that the interest rates have peaked has no opponents in the market, but how soon will they start reversing is not a straightforward deal.

While the food inflation, especially that stemming from perishable food items, is destined to come significantly down, other inflationary pressures cannot entirely be ruled out. With the New Year, upward revision in natural gas prices is imminent, and it would not be delayed, as per the arrangement with the IMF. Similarly, base tariffs for electricity, which were revised last in January 2019, could also see uplift come January 2020. Together, they may have enough steam to keep inflation in double digits, bit longer than what the market anticipates at the moment.

All eyes will be on the strategy reports from the brokerage houses due to come soon, which could set the tone in terms of market’s price to earnings standings. With the index heavily weighted with oil and gas stocks, most of which are not highly leveraged, the oil price movement should be watched more closely than the interest rate movements. A likely reversal in interest rates could well be an offsetting event – banks being the sector with most weights after oil based stocks.