Market outlook for the next week (05-Aug to 09-Aug)

4 Aug 2024 , 09:18 PM

SECTORAL STORY IN THE WEEK TO AUGUST 02, 2024

The week to August 02, 2024 saw the Nifty and the Sensex closing lower, albeit marginally. While the FPIs went into sell-mode post the Union Budget announcement on July 23, 2024, the domestic players continues to be on the buy side. However, this week also had its share of other news flows like a slowdown in growth in China, unwinding of the Yen carry trade and rising geopolitical risk in the Middle East. Here is a quick look at how the 20 key sectors performed in the week to August 02, 2024.

Sectoral Index	Weekly Returns	Index (02-Aug)	Index (26-Jul)
Nifty Energy	2.53%	44,334.25	43,238.30
Nifty CPSE	2.32%	7,510.15	7,340.20
Nifty Healthcare	0.98%	13,837.30	13,702.35
Nifty Oil & Gas	0.68%	13,137.45	13,049.25
Nifty Mobility	0.50%	22,157.32	22,047.53
Nifty Private Banks	0.37%	25,612.05	25,518.20
Nifty Banks	0.11%	51,350.15	51,295.95
Nifty Infrastructure	0.07%	9,379.05	9,372.25
Nifty Consumer Durables	0.06%	39,237.20	39,212.30
Nifty India Digital	0.01%	9,023.90	9,022.80
Nifty Non-Banks	-0.13%	25,361.19	25,394.85
Nifty Logistics	-0.25%	24,873.42	24,936.17
Nifty India Defence	-0.94%	7,409.75	7,480.40
Nifty PSU Banks	-1.01%	7,197.50	7,270.65
Nifty MNC	-1.02%	30,612.05	30,927.35
Nifty Metals	-1.16%	9,314.55	9,423.40
Nifty FMCG	-1.57%	61,745.15	62,728.80
Nifty Automobiles	-2.04%	25,714.45	26,250.70
Nifty IT	-3.04%	39,730.30	40,977.35
Nifty Realty	-3.76%	1,037.15	1,077.65

Data Source: NSE

Here are key takeaways from the tabulation of weekly sectoral returns above.

• Let us start with the macro picture for the week to August 02, 2024. Out of the 20 key sectors, it was an even split with 10 sectoral indices gave positive returns, and 10 sectors giving negative returns. The sentiments were broadly negative as most of the heavyweight sectors like IT, autos and FMCG came under a lot of pressure.
• Let us start with the top gainers for the week. Nifty Energy and Nifty CPSE led the rally with 2.53% and 2.32% gains respectively. The other important sectors that gained during the week included healthcare at 0.98%, oil & gas at 0.68% and mobility at 0.50%. Healthcare stocks are seeing a lot of momentum in the last couple of months and that bodes well for their short term performance.
• There were a total of 10 sectors giving negative returns in the week with several heavyweights. Realty was down -3.76%. IT down -3.04%, Automobiles down -2.04%, and FMCG down -1.57%. Other sectors that also came under pressure in the week included metals, PSU banks, defence, and MNCs. The selling was prominent across all sectors that had rallied in recent weeks and with the Yen carry trade unwinding, the impact was immediately felt on sectors that were trading at relatively steep valuations.
• With only 10 out of 20 sectors giving positive returns in the week, the arithmetic average of returns of these 10 gaining sectors stood at a subdued 0.76%, while the arithmetic average of the 10 losing sectors stood at -1.49%. Compared to last week, the losses in the down-sectors was a lot more acute compared to the gains in the up-sectors. Out of the 20 sectors overall, 2 sectors reported more than 2% gains for the week while on the downside 7 sectors fell more than 1%, with two sectors falling more than 3% during the week.

FPIs were in the sidelines during the week, although the domestic investors continued to be net buyers. The paradox was that the VIX fell to a low of 11.4 during the week, but there was no buying visible on dips. The next week will test whether the low VIX is really sustainable, or more of a statistical aberration.

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

The latest week to August 02, 2024, saw the Nifty and Sensex ending with losses, with most of the selling coming on the last day of the week. FPIs also turned net sellers in the week, after being net buyers in equities for seven weeks and infusing $9.04 Billion in the process.

• The Fed policy meet maintained status quo on rates, but there was a lot of interesting takeaways from the policy statement and the post policy interaction that Jerome Powell had with the media. In fact, Jerome Powell almost acknowledged that the Fed could implement its first rate cut as early as the upcoming Fed meeting in September 2024. However, CME Fedwatch seems to be a lot more optimistic and is pencilling in 2 to 3 rate cuts by the end of 2024 and up to 7 rate cuts by the end of year 2025. Jerome Powell has cautioned the markets not to expect more than one rate cut in 2024.
• FPI flows in the week turned negative after 7 weeks of buying. In the previous 7 weeks, the FPIs had infused an impressive $9.04 Billion into Indian equities. However, in the latest week, FPIs sold $281 Million of equities. This may look like a trend shift, but the quantum of selling was quite small compared to the buying that we saw in the previous 7 weeks. FPIs continued to be net buyers in debt. In the next two weeks, a lot of FPI flows into mega IPOs is expected, so the scenario could change once again.
• The DIPP announced the core sector growth for the month of June 2024, which came in lower at 3.95%. This fall was largely on the back of a steep 320 bps spike in the base. Out of the 8 core sectors, 6 sectors showed positive growth while oil extraction and refinery products witnessed contraction. Now, refinery products has a weightage of 28.04% in the core sector basket, so it had an outsized impact on the final core sector growth. That was one of the reasons for tepid core sector growth in June. On the upside, coal output led the way with 14.25% growth on the back of frenetic demand growth from the thermal power sector, which is producing power at peak capacity rates.
• The week saw the Yen carry trade unwinding and that was one of the key reasons for the sell-off in several sectors, especially where valuations were on the higher side. Yen carry trade is an arbitrage mechanism wherein investors borrow in Yen due to being one of the currencies with the lowest interest rates and deploy in more lucrative opportunities. However, the Bank of Japan has implemented couple of aggressive rate hikes and that has been instrumental in making the carry trade less lucrative. A lot of the EM money has come from carry trades, and that had led to the sharp fall on Friday.
• The India fiscal deficit update as of June 2024 came in at 8.1% of full year target. However, the actual number would be higher. The 8.1% is based on the old fiscal deficit level of ₹16.85 Trillion, but the full budget reduced it to ₹16.13 Trillion. The actual fiscal deficit would be 8.4% of annual target and not 8.1%; but that is still low, thanks to the RBI dividend of ₹2.11 Trillion accounted for fully in May 2024. This should start normalizing once the effect of the RBI dividend tapers and the infrastructure outlays and the food subsidy bill starts getting reflected in the fiscal deficit numbers.
• Geopolitics in the Middle East and West Asia took a turn for the worse during the week. Israel has recently launched concerted attacks on the top leaders of the Hamas and Hezbollah, virtually drawing their sponsor, Iran, into this conflict. Iran has already warned Israel of dire consequences and that has already frayed nerves in global markets. Even the Houthi rebels, who had been silent for the last two weeks, have again started firing at the ships passing through the Suez Canal. This comes at a time when mediators like Egypt and Qatar were trying hard to resolve the stalemate in West Asia by getting Israel to announce a ceasefire. Al Jazeera, recently, published  reports of the number of casualties caused by Israel. This remains a tinder box for now and could have larger implications for global markets. Geopolitics is the area to watch out for!
• In a massive GST default notice to an IT company, the tax department has demanded recovery of ₹32,400 Crore was from Infosys. Infosys had allegedly shown supplies transferred by global offices as operating expenses of the branch, while such a payment should have ideally attracted GST. Infosys has maintained that it has adhered to the law. In a sudden volte face, Karnataka government withdrew its notice, but the centre plans to pursue this case. The notice pertains to Reverse GST mechanism where GST should have ideally been paid by the recipient instead of by the sender.

The week was largely predicated on the monetary policy statement, the unwinding of the yen carry trade and rising geopolitical risks in the Middle East and West Asia. What do the market hold for the coming week?

STOCK MARKET TRIGGERS FOR COMING WEEK TO AUGUST 09, 2024

Here are some of the key stock markets triggers that can influence the direction of the stock markets in the coming week to August 09, 2024.

• Generic indices were under pressure with Nifty down -0.47%, Sensex down -0.43%, and NSE Next-50 down -0.10%. IT stocks, autos and FMCG were the heavyweight sectors that kept the market under pressure. Mid-caps and small caps were tepid showing that alpha hunting had taken a pause. Overall, this trend is likely to continue in the coming week.
• The next week will see some key results. Large cap results of companies in the coming week for Q1FY25 include Bharti Airtel, Eicher Motors, ONGC, Grasim, Shree Cements, LIC, and Lupin. In the mid-cap space, the keys results are expected from Tata Power, ABB India, Marico, Honasa, PFC, Vedanta, Bata, Gland Pharma, Apollo Tyres, Biocon. The week will also see dividend record dates for Berger Paints, Britannia, Chambal, IPCA, NTPC, RITES, BHEL, Ceat, BPCL, Hindalco, HPCL, and REC Ltd.
• The big event in the coming week will be the RBI credit policy statement with the language to be closely watched for signals of dovishness, if any. While rates are expected to remain static, markets are pencilling in the outside possibility of a pre-emptive rate cut by the RBI during the year 2024. It is now clear, when it will happen.
• There will be several global updates to watch out for; and which could have an impact on the Indian markets. Markets will closely watch out for growth cues from China. The expected slowdown in China has put pressure on developed and emerging markets. Oil prices, which fell sharply to $76.81/bbl last week will also be closely monitored. There could be a bounce in prices as the Israel-Iran equation worsened this week. FPI flows will be the other factor to watch for after FPIs turned net sellers to the tune of $281 Million in the week to August 02, 2024. Above all, the focus will also be on how the yen carry trade pans out, due to its relevance to FPI flows into India.
• In domestic macro cues, India PMI services and bank credit / deposit data will be out this week. While markets are keen to see services maintaining their momentum, the focus would also be on whether the deposit growth is picking up in tandem with the frenetic growth in bank credit. The credit / deposit ratio was at multi-year highs.
• The week will be busy for the IPOs. Apart from the SME IPOs, which will be bustling with action, the week will also see action on the IPO mainboard. In fact, there are two mainboard IPOs to open this week, while 3 IPOs will list this week. Among mainboard IPOs, FirstCry and UniCommerce will open for subscription during the week, while Akums Drugs Ceigall India and Ola Electric will list this week.
• Key data points from US markets in the coming week include Composite PMI, Balance of Trade, API Crude stocks, MBA mortgages, jobless claims, wholesale inventories. For ROW, key triggers will be BOJ Policy, PMI, household spending, CAS (Japan); HCOB, PPI, Retail Sales (EU); PMI, PPI, Inflation (China).

Overall, it promises to be a heavy week for data flows in the coming week. Let us finally turn to the outlook for the Nifty and Sensex.

PARTING THOUGHTS ON NIFTY AND SENSEX NEXT WEEK

For the coming week, there are 3 things to keep an eye on.

• Last week, VIX fell sharply to the 11.4-11.5 levels; as the budget uncertainty ended, the lowest level since the election period. Geopolitical risk is high, so traders have to be cautious. Markets are essentially a buy-on-market, but conviction is still missing.
• On the Nifty, the 25,000 level is likely to be a stiff resistance, while the immediate support is placed at 24,800 with the long term supports at 24,100. Only below 24,100, the current rally price structure would get damaged for the Nifty.
• For the Sensex, it hit a barrier at 82,000 for the week, but the next big support to watch will be 81,500 in the short term and 80,000 for the longer term. The low level of the VIX should keep it a buy-on-dips market for now.

The action will now shift to the RBI monetary policy; however, the level of interest will be more on the language than on the actual announcements.