Market outlook for the week from 03-Oct to 06-Oct

2 Oct 2023 , 09:05 AM

It could have been a sharper correction, had it not been for the bounce on Friday, the last trading day of the week. In the first two weeks of September, the Nifty had rallied by 1.98% and 1.88% respectively. However, the third week of September had seen a sharp correction of 2.58% in the Nifty. In contrast, the last week of September, saw the Nifty closing almost flat. For the week, the Nifty has just held above the crucial support level of 19,600, but the next week could be a lot more critical in terms of Nifty levels. The week also saw heavy FPI selling. For the month of September as a whole, the FPIs net sold $1.78 billion in Indian equities. This is in sharp contrast to the $18 billion of net buying between May and August 2023. Global factors also weighed on the market sentiments in a big way.

Even as the Indian markets were absorbing the likely impact of the Canadian diplomatic standoff, they had a new global problem to worry about. The US economy was on the threshold of a major shutdown as the House and the Senate had failed to pass the bill authorizing the necessary spending. In the absence of the approvals, the entire government machinery, barring very essential services, would have come to a standing still. The US House and Senate managed to squeeze in a deal just about 3 hours before the October 01, 2023 deadline, but it once again raises the issue of poor governance that Fitch had highlighted while downgrading US bonds. In addition, the US Fed is now clear it is going to stay hawkish till the end of 2024. Hawkishness may mean a prolonged pause instead of rate hikes, but that is scary enough.

News flows from the previous week to September 29, 2023

There were 7 major factors that influenced the Nifty movement during the week just gone by; and it was a mix of domestic and global factors.

1. The first big factor in the week was the current account deficit announcement. For the June quarter, RBI announced the current account deficit at $9.2 billion or 1.1% of GDP. That is higher than the sequential quarter but almost half of the CAD of the year ago period. More importantly, this gives markets the assurance that the full year CAD for FY24 may not really exceed 1.5% of GDP. That may still be high in absolute terms, but it is manageable. At least, that will not result in a run on the Indian rupee or risks of sovereign downgrades for India. 

    

2. The week also saw the core sector numbers for August 2023 put out at a whopping 12.1%. This comes on top of 8.3% growth in the previous two months. All the 8 core sectors recorded positive growth in August with 5 sectors recording double-digit growth and one sector reporting 9.5% growth. More importantly, the big growth is coming from infrastructure sectors like coal, power, steel, and cement. All these sectors have strong externalities and also have a multiplier effect on growth. It also underlines that the government focus on infrastructure investments and its accent on capex over revenue spending is giving the desired results.

    

3. The other big data point in the week was the fiscal deficit announcement as of the end of August. For the first 5 months of FY24, the actual fiscal deficit had touched 36% of full year target. That is comfortable when compared to the previous year. Also, the government reported surplus on the revenue account underling that the government was really keeping its revenue spending in control. Above all, the RBI put out the central government borrowing program for the second half of FY24 at Rs6.55 trillion is on targe and hints that fiscal deficit for full year may be well withing the budgeted 5.9%.

    

4. Two key data points came out in the US during the week viz., the third estimate of Q2 GDP and the PCE inflation for August. It is the PCE inflation that the Fed uses as the guide for its rate setting program. For August, the PCE inflation was higher at 3.5% yoy but the MOM PCE inflation was up 0.4%. However, the broad message was that food PCE inflation and core PCE inflation were trending lower and the entire pressure on the PCE inflation had come from higher energy prices. On the GDP front, the BEA reiterated 2.1% growth for Q2, same as in the second estimate. This points towards full year GDP growth in the range of 2.1% to 2.2% and raises the prospects of a soft landing for the US economy.

    

5. In the US, two indicators are pointing towards higher yields and stronger dollar. Firstly, the bond yields in the US touched a 17-year high of 4.7% before tapering marginally. This clearly builds a lot of hawkishness in interest rate expectations. The second indicator is the Dollar Index (DXY), which scaled up further to 106.17. This is likely to keep the pressure on the Indian Rupee, which stayed above 83/$ through most of the week. Also, the stronger dollar will translate into a good deal of imported inflation risk for India and that was an overhang in the previous week.

    

6. Brent Crude remained a big talking point ahead of the OPEC meeting on October 04, 2023. After touching a high of 94.50/bbl, Brent crude has tapered to $92/bbl. This is less to do with the demand supply equations and more to do with the strength of the dollar. Since crude oil is expressed in dollar terms, any strengthening of the dollar is negative for the crude oil prices. That is what we saw playout in the week as a stronger dollar brought down the crude oil prices. Even medium and long dated Brent Crude futures are factoring in prices of Brent Crude at under $90/bbl.

    

7. Amidst the concerns over FPI selling and Fed hawkishness, there was also some good news for Indian markets. In the month of September 2023, while FPIs withdrew $1.75 billion, the domestic mutual funds infused $1.1 billion into Indian equities. But the real big announcement came when NSE announced that unique investors on the NSE had crossed 8 crore with the last crore being added in just 7 months. The overall trading accounts on the NSE are well above 15 crore, but the moral of the story is that retail investors are coming into Indian markets in a big way. 

The Fed hawkishness, on the one hand, and the US dilly dallying over the shutdown on the other hand, kept market son tenterhooks during the week. That glossed most of the data flows, which were largely positive; at the global level and at the domestic level. With the noise out of the way, the coming week should allow more data driven market moves.

Stock market triggers for the coming week to October 06, 2023

The coming week will be interesting as there will be a slew of data flows on the domestic front and the global front. Here are the factors that you need to focus on in the coming week.

• Nifty closed the week -0.18% down, thanks to some sector rotation happening. While banks, IT and autos were under pressure; there was some support coming from pharma, metals, and financial services (ex-banks). They may not be substantial in isolation, but their importance is growing in the Nifty. Alpha hunting is likely to continue in small caps and mid-caps, with so much of choice for the investors.

   

• IPO markets are suddenly back in action, although the big ticket IPOs are still elusive. For the coming week, the IPO mainboard will see the IPOs of Plaza Wires and Valiant Labs closing for subscription while the IPOs of JSW Infrastructure and Vaibhav Gems will list this week. Fresh issues are expected in the next 2 weeks, as the new quarter starts and results start trickling in. Action will also be seen in the junior segment with over 10 IPOs set to close for subscription next week.

   

• Of course, the biggest event of the coming week will be the RBI MPC meeting between 04-Oct and 06-Oct, culminating in the monetary policy announcement on 06-Oct. The RBI is broadly expected to keep rates constant at 6.5%, although the language would be the focus in the policy. More importantly, the markets will be keen to see how the RBI deals with the surplus liquidity in the system. They will look at the RBI policy to give a boost to the October effect in markets.

   

• In terms of domestic data flows, the PMI manufacturing and the PMI Services will be announced this week. Both are expected to stabilize around the 60 levels, a level that is well into expansionary mode. Even the auto numbers will be out in the coming week and the focus would be on the PV segment, two-wheeler space and the tractors segment. 

   

• There are key global data points to track in the coming week. Jerome Powell and Michelle Bowman are expected to deliver speeches and give hints on the future course of monetary policy. With PCE inflation higher, YOY and MOM, Jerome Powell and Michell Bowman are likely to talk a more hawkish language this week. Markets will also be focused on the US 10-year bond yields at 4.7% and the dollar index at 106. Both have negative implications for the Indian rupee and for imported inflation.

   

• Finally, there will be some key data points to be tracked in global markets. In the US, the focus would be on data points like the PMI, New orders, Fed speak, JOLTS, API crude stocks, factory orders, jobless claims, unemployment, vehicles. Key data points from the EU will include PMI, unemployment, retail sales and the Construction PMI. Finally, major data points tracked in Japan will include Jibun PMI, BOJ summary, household spending.

In short, it promises to be an action-packed week, but the overall action would depend on an amalgam of domestic and global trends.

Will the Nifty again make a rush for 20,000

Let us look at the data first on the Options front. Nifty options data indicates market support at 19,500 levels and upside resistance at 19,800 levels. If that is breached, then the road to 20,000 opens up. However, the previous week saw the NSE VIX spiking to 13 levels, before tapering. That means; sudden bouts of correction cannot entirely be ruled out.  In a sense the last two weeks were a disappointment as more than half the gains of September were ceded away.

The coming week will see a more cautious and range-bound Nifty ahead of the RBI policy announcement on Friday. While the VIX remains at lower levels, it has become a lot more volatile and that is a risk factor. For a start, the good news is that the US government has put off the shutdown crisis for 45 days. It may not be a solution, but will lead the US markets higher on Monday and that could positively impact Indian market sentiments during the coming week.