Market outlook for the next week (19-Aug to 23-Aug)

18 Aug 2024 , 09:11 AM

SECTORAL STORY IN THE WEEK TO AUGUST 16, 2024

The week to August 16, 2024 saw the Nifty and the Sensex closing with gains, thanks to a late rally on Friday, which turned around the market sentiments. The FPIs sustained their selling, emerging net sellers in the week to the tune of $926 Million, as they remained net sellers on all the 4 trading days of the truncated trading week. The saving grace of the week was the FPI flows into IPOs continued to be positive, while debt flows from FPIs continued to dominate the FPI story. Here is a quick look at how the 20 key sectors performed in the week to August 16, 2024.

Sectoral Index	Weekly Returns	Index (16-Aug)	Index (09-Aug)
Nifty IT	4.70%	40,878.25	39,043.30
Nifty Consumer Durables	3.59%	39,671.50	38,294.85
Nifty India Digital	3.52%	9,200.40	8,887.70
Nifty Realty	2.58%	1,048.65	1,022.25
Nifty Automobiles	0.99%	25,597.35	25,346.65
Nifty Non-Banks	0.70%	25,026.38	24,853.04
Nifty Logistics	0.48%	24,660.99	24,542.42
Nifty Private Banks	0.44%	25,256.05	25,146.50
Nifty MNC	0.38%	30,587.35	30,470.10
Nifty Oil & Gas	0.21%	12,999.75	12,972.75
Nifty FMCG	0.09%	62,213.00	62,157.35
Nifty Banks	0.06%	50,516.90	50,484.50
Nifty Mobility	0.04%	21,874.64	21,866.32
Nifty Infrastructure	-0.09%	9,157.90	9,166.45
Nifty Healthcare	-0.43%	13,879.55	13,940.15
Nifty Metals	-0.49%	8,994.10	9,038.30
Nifty Energy	-1.05%	42,762.70	43,216.05
Nifty India Defence	-1.12%	7,147.24	7,228.49
Nifty CPSE	-1.72%	7,303.65	7,431.55
Nifty PSU Banks	-2.15%	6,843.80	6,994.45

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 16, 2024. Out of the 20 key sectors, the gainers managed to dominate the week. While 13 sectoral indices gave positive returns for the week, 7 sectors gave negative returns. However, even among the sectors that gave positive returns; 9 out of the 13 sectors gained less than 1%. IT, consumer durables and Digital stocks were the big gainers in the week.
• Let us start with the story of the top gaining sectors for the week. Nifty IT with 4.70% gains, Nifty Consumer Durables with 3.59% gains, Nifty India Digital with 3.52% gains and Nifty Realty with 2.58% gains flattered the street in terms of positive cues. There were 9 sectors gaining less than 1% in the week 3 of these sectors gaining less than 10 bps. It was almost like touch and go. However, the big story was the dichotomy between the private banks outperforming and the PSU banks underperforming.
• What about the sectors giving negative returns. There were a total of 7 sectors giving negative returns in the week, out of which 4 sectors lost more than 1%. PSU Banks were down -2.15%. CPSE Index was down -1.72%, Nifty India Defence was down -1.12%, and Nifty Energy was down -1.05%. The selling was prominent across PSU owned sectors, with PSU banks, energy, PSEs, and defence having a predominance of state ownership. Also, these stocks had been among the top gainers in the last few weeks, so this could be more of a logical correction from the highs.
• With 13 out of 20 sectors giving positive returns in the week, the arithmetic average of returns of these 13 gaining sectors stood at a subdued 1.37%, while the arithmetic average of the 7 losing sectors stood at -1.01%. Compared to last week, the losses in the down-sectors are not all that acute, which could be good news for market sentiments.

During the week, the Nifty VIX has moderated to around the 14 levels. However, there are two things to remember here. Firstly, the VIX continues to be volatile and as we saw in the previous week, a 50% jump in the week was quite disconcerting. Secondly, the VIX will have trend in the range of 11-12 for a sustained period of time, before we can really call it a buy-on-dips situation.

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

For the latest week to August 16, 2024, FPIs were net sellers to the tune of $(926) Million. However, there were positive cues on the inflation front, although the growth story shows some missing links. Here is what drove FPI sentiments this week.

• The consumer (CPI) inflation for July 2024 came in sharply lower at 3.54% compared to 5.08% in the previous month. Does this mean that Indian economy is getting into a new normal of low inflation? Unfortunately, not! The inflation level of 3.54% may be lower than the RBI target of 4%, but most analysts have their own concerns at this juncture. Experts feel that the sharp fall in consumer inflation can be attributed to the spike in the base level inflation; with the impact being most apparent in the food basket. While this may not entirely be a flash in the pan, this is unlikely to be the level at which inflation will sustain in the near future.
• Crude oil in the Brent market stayed under $80/bbl, although it did briefly spike above the $81/bbl mark. The US continues to see drawdowns due to a surge in demand for gasoline. In addition, the OPEC does not appear to be keen to bring back supplies to the market. Any disruption from Russia could only add to the problem. For now, it looks like oils would be range bound but with an upward bias.
• Another key data point in the week was the US inflation announcement. The US consumer inflation came in 10 bps lower at 2.9% for July 2024, compared to 3.0% in the previous month. However, that is a full 90 bps away from the ultimate Fed target of 2%. It is still unclear how the FOMC will react to this data point, although it would be also keen to take a look at the PCE inflation for this month before taking a call.
• During the week, two important voices from the FOMC expressed doubts about a September rate cut by the Fed. Raphael Bostic and Michelle Bowman were doubtful if the rate cuts would really happen. According to both these key members, the fall in the inflation was not quick enough to warrant a rate cut in September and they would prefer to see a quicker fall in the last mile inflation. Also, they felt that a rate cut towards the end of the year would be more practical.
• India also announced sharply lower WPI inflation for July at 2.04%; a full 132 bps lower than in June 2024. There is one concern in the WPI story. While the fall in the WPI inflation has been driven by the food and primary basket, the manufactured products inflation is actually higher. That could be a precursor that cost pressures are building for Indian corporates. That remains a grey area for policy makers.
• The USDINR was flat at 83.88/$. While the rupee did briefly breach beyond the 84/$ mark, there was significant support from the RBI as it sold dollars. The RBI has been trying to protect the rupee from weakening beyond 84/$ mark. It remains to be seen if the RBI will continue to defend that level, even if Brent crude goes above $80/bbl. Most likely, the RBI may not be keen to do that!
• During the week, there was some disappointment for Indian economy on the IIP front and on the trade front. Let us talk about the trade front first. India’s trade deficit widened to $23.5 Billion in the month of July 2024; the highest level in last 4 months. The overall combined deficit picture is also much higher than the previous year. That clearly means the CAD could be under pressure in FY25. For India, trade is a double whammy. The Red Sea crisis is impacting the Indian exports to the US and Europe while the imports are getting costlier due to higher freight and insurance costs. On the IIP front; India saw a sharp fall in the IIP growth for June 2024 at 4.24%, compared to 5.91% in May 2024. However, the real concern is that the lower growth came despite a lower base, which magnifies the growth risk. Once again, manufacturing IIP was under pressure and it remains to be seen if manufacturing can drive GDP growth.
• In an interesting development, it emerged that Warren Buffett is sitting on $277 Billion in cash after selling half his stake in Apple Inc. Buffett has always been sceptical about the tech sector in particular and equities in general due to rich valuations. Leaving aside some of the bad trades that Buffett may have had in recent years, he remains an iconic investor with few parallels. Hence, Warren Buffett sitting on so much cash, is hardly an encouraging sign for global investment managers.

The coming week could be more about the key central bank minutes coming from the US Fed and RBI.

STOCK MARKET TRIGGERS FOR COMING WEEK TO AUGUST 23, 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 23, 2024.

• Let us talk about the principal generic indices first. Last week saw the Nifty up 0.71%, Sensex 0.92% higher, and the NSE Next-50 up 0.31%. In terms of sectoral mix, IT was the start while other indices were marginally in the positive. For now, it looks like this defensive trend will continue in the large caps. What about smaller indices? The Mid-cap index was 0.84% up, while the small cap index was 0.14% higher last week. For now, it does look like alpha hunting has taken a back seat, especially given the recent risk triggers in the market.
• The results season is over for most of the major companies in the stock markets. The overall sense is that despite the rise in OPMs overall, the net profits are lower in the quarter. However, we shift focus now to the corporate action record dates for the coming week. There are also several key record dates for dividend including Reliance Industries, Balkrishna Industries, Dr Lal Pathlabs, JK Paper, PI Industries, Sun TV Networks, India Glycol, HAL, Credo Brands, Symphony, Benares Hotels, and ABB India.
• The Jackson Hole symposium from August 22, 2024 to August 24, 2024 will be the focus. Each year, some of the top central bankers and academicians gather at Jackson Hole in the US to discuss global monetary policy alignment in an informal setting. The world markets will be closely watching the speech of Jerome Powell for hints on rate cuts and for the Japanese counterpart for hints on the Yen carry trade. The Bank of Japan remains the only central that has just turned hawkish on monetary policy.
• There are the important minutes of the RBI MPC meet and the FOMC meet coming up next week. Both the minutes will have a lot of relevance to the Indian markets. The FOMC minutes will be closely scanned for indications of when the Fed actually plans to commence rate cuts. It remains to be seen if the enthusiasm of the CEM Fedwatch is matched by FOMC policy minutes. RBI minutes will be key to gauge if the RBI plans to change its policy stance and its rate trajectory in the near future.
• FPI and domestic flows will be key after the FPIs were net sellers for 3 weeks in a row. In the latest week, the FPIs net sold equities to the tune of $926 Million. However, for the week and for the month of August, the domestic buying outweighed the FPI selling leading to a bounce in the equity markets. It remains to be seen if the trend of domestic inflows bettering the FIP outflows continues and whether the FPI trend changes.
• It will be another busy week for IPOs. Two mainboard IPOs of Interarch Building Products and Orient Technologies will raise over ₹800 Crore between them. In addition, there are also 5 SME IPOs opening this week. On the listing front, Saraswati Saree Depot will be the only mainboard IPO to list in the coming week.
• Finally, let us turn to the key data points to watch in international markets. Key data points from the US next week will be FOMC minutes, API crude inventories, initial jobless claims, PMI flash, new home sales, and building permits. In other ROW triggers, the focus will be on Machinery orders, balance of trade, PMI, and Inflation (Japan); Inflation, current account, construction output, PMI Flash, and Consumer confidence (Euro Zone).

Overall, the coming week promises to be heavy on data flows; with the minutes of FOMC and RBI MPC being the most significant.

PARTING THOUGHTS ON NIFTY AND SENSEX NEXT WEEK

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

• Last week, VIX tapered to around the 14 levels, but still remains relatively high by historical standards. The experience of the previous week showed that the tendency of the VIX to remain very volatile and disruptive continues.
• On the Nifty, the 25,000 level is likely to be a stiff resistance, while the immediate support is placed at 24,000 with the long term supports at 22,500. Only below 22,500, the current rally price structure is likely to turn decisively negative.
• Sensex closed the week above 80,000, but 81,000 and 82,000 have been key barriers for the Sensex. However, Sensex has found support in the 78,000-79,000 range. The elevated VIX still does hint at buy on dips.

The coming week could be decisive with minutes, but the big data will be Q1 GDP in the last week.