Market outlook for the next week (29-Apr to 03-May)

29 Apr 2024 , 12:22 PM

WHAT COULD TRIGGER A CORRECTION IN THE MARKET?

In the stock market, it is always good to play the devil’s advocate time and again. We often get lulled into complacency and believe that everything is hunky dory. Look at the Indian context. There is a general election in progress, there is a West Asian crisis and valuations in India are not exactly cheap. However, nobody is really worried about a major correction. One argument is that Indian economy is moving from $3.5 trillion to $5.0 trillion. In that kind of scenario, everything else is just noise. Here are 4 factors that could really trigger a market correction in the Nifty and Sensex in the current scenario.

• Equities become obviously too expensive against bonds. Today the bond yields in India stand at around 7.2%. With the P/E ratio at around 22x, the earnings yield on equity is already at 4.55%. That is already equity tolerance quite stretched. Should the bond yields suddenly spike to 8%, we could see a huge sell-off in equities.
• The third situation is if people suddenly start believing that equity investing is the answer to all problems. That is partially the situation today, but we are still not in euphoria zone. Should we reach a situation where every investor only wants to buy and nobody wants to sell; then we are looking at an extremely vulnerable market.
• Finally, if geopolitical risk takes a turn for the worse, we could see a deep correction in the market. Imagine a situation where Iran and Israel get embroiled in a full-fledged war, or if China actually turns the aggressor against Taiwan or if the situation in Russia and Ukraine takes a turn for the worse. That could be really bad for Indian markets.

The strange part of corrections is that they normally occur when you least expect them to happen. That has always been the case and that will always be the case. We have learnt the lesson the hard way in 2008, 2013 and again in 2020.

WHAT WE READ FROM THE VIX CRASH?

The VIX cracked sharply in the week from above 14 to just above 10. In fact, on Monday, the VIX fell by over 20%, one of the sharpest falls in recent memory. Now, the VIX is also called the fear index and shows the amount of panic that is built into the market in the options prices. One thing is clear, options are not pricing any risk in the markets and that may not always be a positive sign. For instance, if the VIX remains so low in the midst of election season and at a time when the geopolitics is so volatile, it only means that the markets are just downplaying the risk inherent in the market. The downside risks is that it makes the market very vulnerable even to the slightest shock. That is one way to look at the inordinately low VIX in such volatile times.

WEEK THAT WAS; THE GOOD, THE BAD AND THE UGLY

For the latest week to April 26, 2024, there were a number of domestic and global cues. Here are 8 key data points that influenced stock market direction in the week.

• The big surprise in the week was the US GDP data, which came in sharply lower than expected at 1.6%. This is lower than the market estimate of 2.4%. More importantly, it is also sharply lower than the sequential quarter numbers of GDP growth at of 3.4% and 4.9% respectively. What actually roiled the markets was that the sharp fall in real GDP growth was despite a moderate fall in nominal GDP growth, indicating that rising inflation was the real villain of the piece.
• When we talk of the inflation monster, we did not have to move too far as the next day the fears were confirmed by the PCE inflation data. The inflation based on personal consumption expenditure came in 20 bps higher at 2.7% for March 2024. That is on top of a 10 bps spike in February. The pressure on PCE inflation came from across food, energy and also core inflation. Markets were concerned that the unwinding of the supply chain risks were saturating, meaning core inflation may not fall much further,
• On the banking front, thew news was about RBI imposing a ban on Kotak Bank taking in new credit customers and acquiring new banking customers through tis digital channel. Apparently, there were too many missing links in the IT audit done by the RBI and they wanted Kotak to first put the house in order. The stock tanked sharply, but other banks did manage to rally during the week, especially those in direct competition with Kotak.
• The big news in the market this week was the sharp fall in the VIX (volatility index) or the fear index. It fell from above 14 levels to around 10 in a single day. The 20% fall in VIX could be a double edged sword. It could either hint at the bottoming of the market and a buy-on-dips market; or it could be indicative of a vulnerable market that is interpreting the risks too lightly.
• FPI selling continued in equities, although it was relatively subdued at $126 million in the week. This is sharply lower than $2.23 billion in the previous week. What is disconcerting is that FPIs have now turned net sellers in debt and equity. That is not a good situation to be in. The FPIs are clearly waiting for signals that the Fed is cutting rates, before committing more funds into India.
• What was the big IPO story of the week. The week was dominated by the follow-on public offer (FPO) of Vodafone Idea. The ₹18,000 Crore FPO of Vodafone Idea got more than subscribed 6.36 times at close and the shares also listed on the bourses at a premium of 25%. This is positive as it gives a lifeline for Vodafone idea and allows them to pull on its business model for another two years.
• Brent crude spike in the week to $89.40/bbl after remaining around $87/bbl for most of the week. The spike came after the US inventories again showed huge drawdowns. In fact, the market was expecting the API to add 1.80 million barrels, but ended up depleting 4.30 million barrels. The robust demand for oil in the US is keeping oil prices under constant upward pressure.
• Finally, what did we read from the quarterly numbers data for Q4FY24? Banks are seeing gradual compression in net interest income (NII) growth and also tapering of net interest margins (NIMs). IT sector is under pressure due to weak constant currency growth in revenues and tepid operating margins. It was the automobiles and FMCG sector that saw relatively better quarterly numbers this time around. Some of the mid-sized names showed pressure due to rupee volatility.

A lot will predicate on how the election outcome translates into government formation in India and, eventually, what it means for the full budget. Markets are likely to be ambivalent till there is clarity on the new government in June and the full union budget in July.

STOCK MARKET TRIGGERS FOR COMING WEEK TO MAY 03, 2024

The coming week to May 03, 2024 will be a mix  of important global and domestic data points. Here is a quick look at that will influence markets next week.

• Last week, Nifty closed with gains of +1.23%, Sensex +0.88%, and Nifty Next-50 closed +3.63% higher. The sharp fall in the VIX, combined with short cover pushed the indices higher. However, with a sharp fall in VIX and rupee stable, the real action was in the small indices with the Mid-cap index +3.96% higher and the small cap index +4.37% up.
• Among Q4 results announcements this week; key large cap results include Ultratech, IOCL, Havells, Britannia, APSEZ, Coal India, Titan, AGEL, Adani Power. In addition, the key mid-cap results this week include Trent, Tata Chemicals, P&G Hygiene, Adani Wilmar, Ambuja Cements, Dabur, MRF. This week, a more macro trend will start to emerge.
• FPI flows will be in focus in the coming week. After FPIs sold $2.35 billion in the last 2 weeks, markets are expecting some respite, especially with the sharp fall in VIX in this week to around the 10 levels. However, FPIs are likely to remain wary about the Fed hawkishness for now.
• In domestic macro data, the core sector growth or infrastructure growth for March 2024 and for FY24 will be put out on Tuesday. After reporting 6.7% core sector growth in February 2024, the March 2024 core sector is also likely to be robust due to low base. This is a direct reflection of the capital spending aggression of the government.
• The Controller General of Accounts or CGA will publish updated fiscal deficit for fiscal year 2024 compared to its target. What is of interest here is to see if the government has managed to rein in the fiscal deficit at less than 5.8% of GDP for fiscal FY24. That will pave the way for the glide path to 5.1% in FY25 and below 4.5% in FY26.
• The US Federal Reserve will present its May 2024 Fed policy statement on Wednesday. Already, the markets have ruled out any rate action or even rate signals in this policy meet. However, there is an outside expectation that the government may confirm just a single rate cut in 2024, which could partially dampen the market spirits.
• Two more data points to note in the week will be the crude prices and the auto sales. Crude closed at $89.4/bbl and any rate above $90/bbl could have macro implications. On auto sales, the expectation is of double-digit growth in PVs and 2-wheelers, but weakness in commercial vehicles.
• Finally, let us turn to the other key data points to be tracked globally in the coming week. Kay US data points include FOMC meet, API inventories, HPI, JOLTS, PMI Composite, jobless claims, vehicle sales, factory orders and trade. Other data points are GDP, unemployment, consumer confidence (EU) employment, retail sales, PMI, BOJ minutes (Japan); and Caixin Manufacturing PMI (China).

PARTING THOUGHTS ON NIFTY AND SENSEX NEXT WEEK

For the coming week, there are 3 things to watch out for, and which would determine the context for the future direction of the market.

• The coming week will be a truncated trading week with Wednesday being a trading holiday. The big story will be the sharp fall in the VIX last week from above 14 levels to around 10 levels. This fall could either be a genuine indicator of lower risk or it could be about markets treating risks too lightly.
• Nifty supports at 22,300 on the downside and 22,000 would be the more decisive support for the Indian market. On the upside, if 22,500 is breached, then the Nifty could target levels of 22,800 and 22,900 on the upside. If the VIX continues to remain in the range of 10-11, it could emerge as a genuine buy on dips market.
• What Expectations on the Sensex? The Nifty faced resistance at 75,000 levels, which led to a sharp correction. If the Sensex is able to decisively break above the 75,000 mark, then we could the doors opening for higher levels like 78,000 and 80,000, although that would only happen after a time-wise correction and consolidation is completed.

To sum up, we are entering a critical week with election uncertainty mounting and FPIs getting slightly jittery about Indian markets. The big triggers that the markets will wait for is the formation of the new government, the full budget presentation, and the data on the monsoons and the first estimate of Kharif output. That will hold the key to the markets.