Market outlook for the next week (21-August to 25-August)

21 Aug 2023 , 06:37 AM

The latest week to August 18, 2023 was the third consecutive week of negative returns. After falling 50 bps and 66 bps in the previous two weeks, the Nifty fell by another 61 bps in the latest week. Banks continued to be under pressure due to Moody’s downgrading small and mid-sized banks in the US. With financials having a weightage of 37% in the Nifty, the impact is quite apparent. The Nifty has not just struggled around the 20,000 levels but over the last 3 weeks it has consistently made lower tops and lower bottoms, which has actually spoilt the structure of this rally. Over the last 3 weeks, the Nifty has drifted lower from 20,000 levels to the 19,300 levels. Interestingly, the Nifty VIX, a measure of implied volatility of the Nifty, has gone up sharply to 12.2 levels in this week, marking the highest level of the volatility index since May 2023. That makes the Nifty vulnerable to downward shocks.

The big macro factor in the week was consumer inflation in India which spiked to 7.44% for July 2023. Now, this really creates a policy dilemma for the RBI. It needs to keep rates low to ensure that corporate solvency ratios are not impacted. At the same time, it is tough to remain stoic about repo rates when inflation is a full 344 basis points away from the RBI target. Considering the spike in inflation in July 2023, the RBI may have to seriously look at a rate hike. The only question is whether the rate hike comes in the normal course in October, or will the RBI try to pre-empt any real rate concerns by hiking the rates even before the next policy announcement in October 2023. We have to wait and watch; but inflation was the big story of the previous week.

News flows from the previous week to August 18, 2023

There were 5 major news items that influenced the Nifty movement during the week just gone by.

1. Consumer inflation or CPI inflation was the big story as it spiked to 7.44% during the week. To underline the price problem, even the WPI inflation moderate by nearly 300 bps, although it stayed in the negative. The pressure on CPI inflation came from a spike in food inflation to above 11%. At the same time, other key components of the food basket like cereals, pulses, and mild have seen a sharp spike in inflation. The RBI now has to not only manage this inflation spike, but also the inflation expectations. In the past, the RBI has been very particular about managing the inflation expectations deftly.

    

2. The first quarter has just concluded in terms of key results and the aggregate picture was along expected lines on top line but flattered on the bottom line. Revenues (ex-banks) for Q1FY24 grew by 6.5% while the profits (ex-banks) grew 44%. The dichotomy comes from the sharply higher gross margins, that stems from the steep fall in commodity prices globally. Not only did the gross margins expand by 300 bps in the quarter, but overall margins on the EBITDA front was also much better than expected. In terms of top line, while global sales continued to be under pressure, rural sales showed green shoots of recovery in the quarter. Overall, it has been a satisfying Q1FY24.

    

3. An important global even this week was the publication of the FOMC minutes. The Fed publishes the minutes of its Fed meeting after a gap of 21 days. The tone of the minutes appears to be a little too hawkish. Post the minutes, the CME Fedwatch began to ignore the possibility of a long pause and are expecting another one to two rate hikes. The minutes also underlined that the Fed bond book had come down from $9.2 trillion to $8.1 trillion and that liquidity tightening would act as a substitute for tightening. Rising US bond yields creates a problem of real interest parity with the US markets.

    

4. In a week, when the rupee stumbled to an all-time low of Rs83.16/$, there were major concerns over FPI flows. Most FPIs prefer a strong local currency to ensure that their dollar returns are protected. However, with the RBI not intervening too aggressively to defend the rupee, the rupee has been persistently weakening in the last couple of weeks. Crude oil was the other big variable in the week as Brent crude corrected from $87/bbl to below $85/bbl. The fall in oil prices was due to a combination of fears of weak oil demand as well as a strengthening dollar, since oil is expressed in dollars.

    

5. In a major development last week, Reliance Industries announced that it would list Jio Financial Services Ltd on Monday August 21, 2023. It remains to be seen how the stock trades. In the dummy listing session, the price of Jio Financial had bene discovered at Rs261.85. A spike in the stock price will be value accretive for RIL and also for individual shareholders. More importantly, this move will post a major competition to the NBFCs and Fintech players in India. But, this move, also sets the tone for eventual hiving off and listing of other businesses of Reliance like O2C, digital and retail.

With the results season over and most of the macro data points already announced, there are some key factors that the markets will watch out for. The first will be global hawkishness. Clearly, the Fed is going to implement more rate hikes, so pressure on the RBI to match real rates will remain. The RBI and the Indian economy would be worried about the weakening dollar and the RBI intervening at this juncture. 

The Fitch downgrade of US debt led to a surge in risk-off flows and that has led them to underplay India. That has led to the rupee weakening vis-à-vis the dollar. The spike in the dollar would automatically contain the price of crude oil and gold. However, the weak rupee has the potential to spike imported inflation in the Indian economy. That remains a key concern, especially considering India’s huge global crude dependency.

Stock market triggers for the coming week to August 25, 2023

Let us now turn to some of the key stock market triggers to watch out for in the coming week, which could impact the colour and direction of the market move.

• Most indices were in the red this week with the Nifty losing -0.61%, Nifty Next-50 falling -1.99%, the Mid-Cap 100 index flat and the Nifty Small Cap 100 index lower by -0.55% for the week. The Nifty is close to its support of 19,300 and the next veritable support is only at the 19,000 levels of the Nifty. However, there are some concerns with VIX touching a 4-month high, opening the gates for the Nifty to fall further from these levels.

   

• The big event of the coming week will be the listing of Jio Financial Services. On the NSE it will list with the symbol of JIOFIN on Monday, August 21, 2023 in the trade to trade (BE) segment. There will be only delivery in the counter. This move also sets the tone for sum of total parts (SOTP) valuations of Reliance, which is likely to be much higher than the current market cap. Also, the Jio Financial demerger sets the tone for RIL to hive off its other major units like O2C, retail and digital into separate listed companies. That may still be some time away.

   

• Next week, the RBI will release the minutes of the recent MPC meet on August 24, 2023. Since inflation has spiked sharply in July 2023 to 7.44%, the markets will look at the minutes for hints of a hawkish shift by the RBI. Currently, the MPC members representing the RBI are already in favour of more rate hikes to break the back of the inflation monster. Like the Fed minutes, even the RBI MPC minutes are likely to adopt a hawkish stance this time around.

   

• What about high inflation and rupee direction. We may see response to the rupee, either this week or in the coming weeks. However, the key macro to watch now is the rupee levels, which his closely connected to the dollar index (DXY). In the coming week, Michelle Bowman and Fed Chair Jerome Powell are expected to speak and that could set the tone for how a more hawkish monetary policy will be rolled out by the US government. 

   

• The Jackson Hole symposium of central banks will happen this week, where the heads of global central banks are expected to discuss ways and means of synchronizing monetary policy and dealing with the spike in inflation. In the last two years, US, UK, and EU have held a hawkish stance, while the central banks of Japan and China have avoided too much hawkishness in the interest of promoting growth in GDP and IIP.

   

• There is IPO action picking up in the coming week. Two mainboard IPOs will open during the week viz. Aeroflex Industries Ltd and Vishnu Prakash. Both are a combination of a fresh issue and an offer for sale. In addition, Pyramid Technoplast will close for subscription during the week while TVS Supply Chain Solutions will list during the week. This is on the mainboard and the robust flow of IPOs in the SME segment is likely to continue in the coming weeks.

   

• Finally, let us look at some of the key global data points to keep an eye on. In the US markets, the focus should be on Existing home sales, API stocks, Composite PMI, jobless claims, durable goods orders, and Jackson Hole indicators. In rest of the world, focus on data flows like the Current Account, HCOB, and Composite PMI flash in EU as well as the Jibun Bank Manufacturing, services, and Composite PMI for Japan.

In terms of domestic macro data flows next week, the RBI MPC minutes and the will be the big story of the coming week while US inflation will be the big global focus. Markets will also keep a tab on portfolio flows into India in the wake of weakening rupee and the US downgrades by Fitch and Moody’s.

How we see market levels shaping up in the next week

Currently, the markets are poised at a very interest point. For example, the Options data and Nifty charts are both hinting at a narrow range of 19,200 to 19,400 for the Nifty with lacklustre trade. However, the joker in the pack could be the VIX or the volatility index. It has spiked in the last few weeks and touched the highest level of VIX since May 2023. The rising VIX also means that its contribution towards limiting downside risk in the markets would be constrained. 

The stress of domestic inflation and global downgrades has given rise to a problem of flows into India and that is likely to be a key factor determining market direction in the coming week. It looks like; after the sharp rally in the Nifty, macros and micros are combining to limit the upsides.