Market outlook for the next week (10-Jun to 14-Jun)

9 Jun 2024 , 10:16 AM

STORY OF SECTORAL INDICES IN THE WEEK TO 07-JUN

The week to June 07, 2024 can be described as a week that was incredibly volatile but also ended up with sterling gains in most indices. During the week, the markets tanked sharply on the day of the vote counting as the ruling NDA got a much smaller majority than had been predicted in the exit polls. In fact, the 292 seats for the NDA was just above the 272 mark and the BJP on its own could only muster 240 seats. That made the NDA government overtly dependent on the support of allies like the TDP and the JDU. However, sanity appeared to return to the markets as the real stories like the flattering GDP growth and the lower than expected fiscal deficit were factored into the calculations. Above all, the sharp fall in the VIX for the week was a clear testimony to the resilience of the equity markets. Here is a quick dekko at how the key sectors performed in the week.

Sectoral Index	Weekly Returns	Index (07-Jun)	Index (31-May)
Nifty IT	8.60%	35,169.90	32,386.10
Nifty FMCG	7.11%	57,953.35	54,107.35
Nifty India Digital	5.47%	7,952.50	7,540.25
Nifty Logistics	5.10%	23,443.73	22,307.14
Nifty Realty	4.91%	1,069.50	1,019.40
Nifty Healthcare	4.60%	12,337.80	11,795.10
Nifty MNC	4.16%	29,737.85	28,550.80
Nifty Mobility	4.10%	20,675.83	19,862.12
Nifty Consumer Durables	3.57%	36,384.90	35,130.20
Nifty Financial Services	2.06%	22,165.80	21,718.30
Nifty Private Banks	1.99%	24,706.90	24,224.10
Nifty Banks	1.67%	49,803.20	48,983.95
Nifty Metals	1.13%	9,833.60	9,723.60
Nifty Infrastructure	0.98%	8,752.60	8,668.00
Nifty Oil & Gas	0.62%	11,696.65	11,625.00
Nifty Energy	0.07%	40,283.30	40,255.50
Nifty PSU Banks	-1.41%	7,281.90	7,386.00
Nifty CPSE	-1.72%	6,474.90	6,587.90

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 31-May. Out of the 18 key sectors, only 2 sectoral indices gave negative returns viz. PSU Banks and CPSE. The remaining 16 indices gave negative returns for the week to June 07, 2024. That can be largely attributed to the fears that PSUs may not get sustained encouragement in a coalition government, a fear that the prime minister has since sought to allay categorically.
• The big starts of the week were surprise packages. IT gained 8.6% and the FMCG index gained 7.1%. For IT, the story was about the sharp recovery in the US economy as reflected by the robust labour data. That would obviously mean higher IT spending and concomitant benefits from a strong dollar. For the FMCG index, it was about revival in rural demand and also the lower crude prices, which settled below $80/bbl.
• If one looks at the last week returns, the outperformance has apparently come from the defensive sectoral names while the cyclicals have been relatively tepid during the week. Of course, things could change once the government lays out its game plan for the term.

The sector story was distinctly positive in that 16 out of 18 sectors ended higher for the week. That is an exact reversal of the previous week. Now, the markets will look out for key reform cues, budget indications and the current account deficit later this month.

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

For the latest week to June 07, 2024, there was finally the end of political uncertainty and reversion of the VIX to more normal levels. That shows protection being aggressively unwound. FPIs were net sellers of $1.78 Billion, with most of the selling coming in the last 3 days of the week. Here is a quick look at the big data and news announcements in the week.

• It is hard to say whether the exit polls failed to read the sentiments or whether they preferred to err on the side of caution. It looked more like the latter. To sum it up, the exit polls proved the old Yogi Berra saying that, “It ai’nt over till it is over.” The NDA ended up with just about 292 seats against the exit poll prediction of 370 to 400 seats. That is an awful miss. The BJP got just 240 seats; well short of the 272 mark and has to depend on the allies for getting the numbers. That raised the fear in the market that coalition appeasement politics may come into play. These are early days and, for now, the prime minister has assured the nation that it will be business as usual. The first indications will only come when the NDA releases its 100-day plan and the full Union Budget document for the financial year 2024-25. That would be in mid-July.
• FPIs turned net sellers in the week, ending the week net sellers of $1.78 Billion in equities. That continues the broad trend of the last 6 weeks, when the FPIs have been predominantly on the sell-side. Some of the concerns of FPIs are justified. Their fear is that the coalition government may force too much of appeasement. After all, the BJP gets the requisite numbers only with the support of the TDP and the JDU. Both parties want special status for their respective states of Andhra Pradesh and Bihar. However, that would imply a huge fiscal burden and that may allow the fiscal deficit targets to go for a toss.
• The week also saw a quiet RBI policy announcement. As expected, the RBI maintained status quo on rates and also kept the monetary stance as “gradual withdrawal of accommodation.” For a change, two MPC members dissented to this decision, with Jayanth Varma and Ashima Goyal wanting a 25 basis points rate cut as well as a shift in the policy stance to accommodative. In other MPC policy updates, the RBI maintained inflation forecast for FY25 at 4.5%, which is understandable due to Kharif uncertainty. However, the RBI was possibly too conservative raising the GDP forecast for FY25 by just 20 bps instead of the 50 bps that was expected.
• The big news of the week came from the US macro data flows. The better than expected jobs data in the US was indication that the US economy was a lot stronger than expected. That means rates would not be cut in a hurry and would stay higher for longer. This led to a surge in the bond yields and also led the US dollar index to surge from 104.10 to 105 levels on Friday. The immediately outcome was that the CME Fedwatch reduced its probability of rate cuts in September from 47% to 40%.
• Finally, no discussion of the week would be complete without talk about the volatility that afflicted the markets in the week. Some of the numbers are really shocking. For the week, the Sensex made an average High / Low gap of 2,492 points each day. This is the intraday index move per session on average. The daily high low gap was as low as 823 points on Thursday and an incredible high of 6,066 points on Tuesday, the day of counting. PSU stocks bore the brunt of the selling with PSU Banks and CPSE the only indices giving negative returns for the week. Amidst all this uncertainty, the Nifty and Sensex closed 4 days in the positive and only one day in the negative. Above all, the VIX fell sharply in the week from above 24 levels to around the 16 levels, indicating that protective positions were being aggressively unwound.

At the end of the day, the markets chose to ignore the noise surrounding the elections and focus on the more immediate reality of robust GDP, and lower than expected fiscal deficit.

STOCK MARKET TRIGGERS FOR COMING WEEK TO JUNE 14, 2024

Here are some of the key stock market triggers for the coming week to June 14, 2024; that could influence the colour and direction of the markets.

• It was a week of hefty gains for the generic indices. Nifty gained +3.37%, Sensex gained +3.69% and the Nifty Next-50 gained +2.51%. For the coming week, the aggressive short covering is likely to keep the indices in the positive, by which time the new government should be sworn in. Among smaller indices, Nifty Mid-cap 100 gained +2.88% while the Small cap 100 closed with +3.11% gains. The big themes in smaller stocks are likely to be defence, green energy and Andhra Pradesh based stocks.
• The week saw stellar gains from IT and FMCG. While IT index gained 8.6%, the FMCG index also gained 7.1%. Both are likely to see a lot of pent-up buying demand come into play. IT sector is likely to gain next week also on better than average US labour data hinting at strong growth in IT spending. FMCG could be more of a rural demand revival story and low crude prices.
• In the big news to watch for, the stock markets will await PM’s address after forming Modi 3.0 government. It will be a new experience running a coalition government and hence the focus would be on how the investment climate and the reforms would be managed in the current scenario. The markets will be keen to hear the economic growth trajectory under coalition and key cues for the full budget in July 2024.
• Watch for further normalization of the volatility index (VIX) next week. Last week, the Nifty VIX fell from above 26 levels to around the 16 levels, indicating normalizing volatility. The next week could see more of shorts being covered pushing the VIX still lower from the current levels.
• Two major macro data points are expected in the coming week. India CPI inflation will be announced by MOSPI on next Wednesday. With CPI inflation at 4.83%, the market will look forward to cues on likely rate cut time table. IIP growth will also be out this week. The IIP is expected to better 4.9% in March, but the focus would be on improved manufacturing IIIP, which is already at 5.2%.
• In a key development, the US Fed will present its June monetary policy on Wednesday. Prima facie, no rate cuts are likely in June, although the Fed may guide for the first rate cut in September on strong data. The CME Fedwatch probabilities are also likely to be fine tuned after this event. On the same day, US CPI inflation will also be announced by the BLS. The core inflation is expected to fall 10 bps, while headline inflation may remain flat at 3.4% for the month of May 2024. It will be a signal for the Fed policy stance.
• India trade deficit for May 2024 will be put out by the Directorate General of Foreign Trade (DGFT) on Friday. The merchandise deficit is expected to taper from $19 Billion but focus will be on services surplus and CAD impact. It will set the tone for what could be the tone of CAD for FY24 to be announced later this month.
• In key data points for the US markets, the focus will be on API crude stocks, core CPI, federal budget balance, Fed statement & rate decision, PPI, initial jobless claims. In rest of the world (ROW) markets, the focus will be on elections, IIP, trade balance (EU), BOJ Monetary Policy, GDP, IIP (Japan), CPI, PPI (China), and GDP, IIP, Trade deficit (UK).

Let us finally look at the outlook for the Nifty and the Sensex in the coming week.

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 big story will be the VIX. It sobered from 24 to 16 last week, and more sobering is likely next week as the new government gets down to business and the short covering further reduces the VIX from the current levels.
• For the Nifty, 23,000 now becomes the decisive level. If Nifty holds above 23,000 with volumes, then the next target would be 25,000. Short covering alone will not be enough and the Nifty will require strong support from fresh FPI buying.
• For the Sensex, the level of 75,000 has been taken out. At 76,000 plus, the next big resistance would be closer to 81,000. Sensex will need the support of a positive reforms agenda from the government for the next leap.

The undertone of the market has apparently shifted decisively last week. While the mandate may not be absolute for the BJP, coalition politics is nothing new in India. It would now be about making the right reformist noises.