Market outlook for the next week (22-Apr to 26-Apr)

22 Apr 2024 , 09:23 AM

HOW OIL IMPACTS THE INDIAN STOCK MARKETS?

Today, any discussion about stock markets is incomplete with detailed discussion of the oil price trajectory. After all, oil is central to the Indian economy and India still relies on imports to meet over 80% of its daily crude oil needs. That is because, India has a refining capacity that is nearly 10 times its oil production capacity. In such situations, oil is not just central to the Indian economy and the rupee value, but also to inflation and to corporate performance. The recent spike in oil prices to nearly $90/bbl has had an impact on a number of segments of oil users Here is a quick dekko.

The spike in oil prices is positive for oil extractors as it results in better realization per barrel. In recent times, that is limited due to the windfall tax on oil. Oil refines also tend to gain from higher oil prices as it generally improves the gross refining margins (GRMs) and also leads to higher valuation of inventory. There are two sectors that take a hit. Oil marketing companies (OMCs) would typically see their marketing margins come down, more so in the Indian context where the effort is to ensure that petrol and diesel are available at reasonable costs. Then there are the user industries like aviation, tyres, paints, and toiletries that use crude oil as a key input. These sectors also get hit by higher oil prices.

A TALE OF 3 FED OPINIONS

During the week the Fed Speak covered the opinions of 3 key FOMC members, with the outcome being almost the same in all the cases. Loretta Mester, of the Cleveland Fed was of the view that the best the Fed could do at this juncture was to hold interest rates steady. According to Mester, rate cuts were too premature at this stage. Raphael Bostic of the Atlanta Fed felt that rate cuts would only be appropriate towards the end of 2024; not before that. That would hopefully gel with lower inflation levels and the need to reduce the borrowing costs to boost the economy. Lastly, Neil Kashkari of the Minneapolis Fed was uncharacteristically hawkish. Kashkari felt the Fed needed to achieve more confidence that inflation was decisively trending towards 2% before cutting interest rates and suggested delaying such a move to 2025. The common thread was; it was just too early for rate cuts.

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

For the latest week to April 19, 2024, the markets had a number of domestic and global cues. Here are 8 key data points that influenced stock market direction in the week.

• Needless to say, the big influencer of the market weakness in the week was the deteriorating geopolitical situation in the Middle East and West Asia. The situation is that a war is bad and a stand-off is equally bad because it keeps the global markets (including Indian markets on tenterhooks. That is not going to be too helpful.
• FPI outflows defined the week. In the 4 trading days during the previous week, the FPIs were net sellers to the tune of $2.23 Billion. That more than offsets the $1.64 Billion of net inflows in the previous week. The irony was that FPIs were not only sellers in secondary market equities, but also ended up being net sellers in debt markets. That is a clear indication of a trade that is weighted against India.
• The trade data for March 2024 and for FY24 were announced during the week. The trade deficit for March was very close to its 1-year low at $15.6 Billion. With the services surplus robust, the full year overall deficit came in at just $78 Billion. That gives the hope that the current account deficit (CAD) for FY24 can be reined in at around 1% of GDP.
• The Monetary Policy Committee of the RBI published the minutes of the April MPC meet as 5 of the 6 members veered towards a wait-and-watch approach to rate cuts. Barring the dissenting not by Jayanth Varma, the other 5 members of the MPC favoured holding rates for now and take a view on rates only after inflation showed a clear trend towards 4%. More importantly, the focus on the sobering of food inflation.
• Two key corporate results in the week disappointed the street. Infosys announced a sharp growth in net profits, but it was purely on the back of the tax refund. Shorn of the tax refund, the OPMs were 50 bps lower and the revenue growth guidance for FY25 has been cut to 1-3% range. In addition, HDFC Bank reported flat profits QOQ, despite earning ₹7,360 Crore of exceptional gains from the sale of HDFC Credila.
• The US bond yields and the US dollar index hardened in the week on the back of Fed speak in the week hinting at just about 1 rate cut in 2024. That is a far cry from the 3 rate cuts that Jerome Powell had promised to the markets. The impact was felt on the US bond yields and the dollar index. For India, hardening in these variables has the effect of hardening Indian bond yields and also weakening the Indian rupee.
• The week showed that the appetite for big IPOs was still intact. While the final subscription figures of the Vodafone Idea FPO will only be known by Monday evening, the anchor response was robust with the anchor investors absorbing 30% of the ₹18,000 Crore IPO. That is a promise that the QIB portion should be robust, although the retail and HNI portion may be tepid. This should be a boost for the IPO markets.
• Of course, no discussion of the market during the week is complete without a discussion on the crude moment. Surprisingly, crude prices on Friday fell sharply from $90/bbl to $87/bbl. There were hopes of an amicable resolution to the West Asia stand-off. More importantly, markets believe that OPEC should start releasing stocks at higher levels. After all, they don’t want the US and Canada to make hay while the sun shines.

Behind these weekly disruptions in the market, there is a larger fundamental story. For example, there is revival in the investment cycle, corporate leverage is at a multi-year low of 0.57X, and capacity utilization is at 75%. Big capex is on the cards, but for now, the story of the markets is going to be all about the short term concerns. They cannot be wished away!

STOCK MARKET TRIGGERS FOR COMING WEEK TO APRIL 26, 2024

The coming week to April 26, 2024 has some key global data points. But the focus would also be on domestic Q4 results and on the emerging geopolitical situation in the Middle East and West Asia. Here is a quick look at that will influence markets next week.

• Nifty closed the week down -1.65%, Sensex down -1.56% and the Nifty Next-50 -1.87% lower. Clearly, the tensions in West Asia appear to be hitting the mainline stocks hard as FPIs are turning cautious. However, this applies to smaller indices too. The mid-cap index fell -2.74% lower while the small cap index also fell by -1.37%. After all, when trades turn cautious, the index capitalization hardly matters.
• The coming week will be about the market reaction to HDFC Bank Q4 results. In addition, there are major large cap Q4 results expected from Reliance, ICICI Pru Life, TCPL, ICICI Bank, Axis Bank, Hindustan Unilever, ACC, IndusInd, Nestle, and Tech Mahindra. Key small cap results this week include Persistent Systems, Rallis, Tejas Networks, Tata Elxsi, Dalmia Bharat, OFSS, Cyient, LTTS, Tanla Solutions etc.
• FPI flows will remain in focus this week after heavy selling in the previous week. In the week to April 19, 2024, the FPIs sold equities of $2.23 Billion and were sellers in debt too. With the sentiments turning cautious, this selling is expected to continue in the coming week too. The only hope is that if the situation in the Middle East and West Asia improve, then one can expect a short covering rally in the coming week. A lot will eventually depend on how the crude oil prices pan out in the coming week.
• In the coming week. There are 2 key US based data points that will have an impact on the Indian markets. Firstly, the US Bureau of Economic Analysis (BEA) will publish the Q1 GDP first estimates on Thursday. After a record show last year, Q1 GDP is expected to settle at 2.5% in Q1, but could surprise on the upside. The other big data point for the week will be the US PCE inflation, based on personal consumption expenditure, which will be published by the BEA on Friday. In tandem with the CPI inflation in the US, even the PCE inflation is expected to edge higher. The combination of higher GDP and higher inflation would almost confirm just one rate cuts in 2024; or perhaps none at all!
• US bond yields and dollar index will continue to be in focus this week. With the US Fed almost hinting at just about one rate cut in this year, the bond yields in the US and the dollar index have been trending higher. They have an impact on India bond yields and also on the Indian rupee. In addition, gold prices continue to be on a roll and that will have the markets worried as gold briefly crossed $2,400/oz this week. As panic spreads on the war situation, gold is likely to cross $2,500/oz this week and that is not great news for equities as an asset class.
• In the IPO market, the big news has been about the Vodafone Idea FPO which opened on Thursday last week and closes on April 22, 2024. The ₹18,000 Crore FPO saw 30% anchor absorption while the final IPO response will be known by end of Monday. The other main board IPO that opens this week is JNK India IPO; which opens on April 23. In addition, there are also a slew of SME IPOs slated to open in the coming week.
• Finally, let us turn to the key data points to watched for in the coming week. In terms of US data cues, the focus would be on Q1GDP, PCE, composite PMI, home sales, API stocks, trade balance, Atlanta Fed GDP, and building permits. In terms of ROW data flows, the focus will be on PMI and ECB speak (EU); PMI, core CPI and BOJ statement (Japan); PBOC interest rate outlook (China); and composite PMI (UK).

The coming week data flows will be largely about the quarterly results and the evolving situation in the Middle East and West Asia. For now, markets are living on hope.

THREE 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.

• In the truncated previous week, the markets closed lower on the first 3 days and bounced on the last day. A lot will depend on whether the last day action was genuine buying at lower levels or was it pure short covering. After all, a short covering rally would only have limited legs from these levels.
• VIX would be the big story to watch out for next week. Last week, the VIX rallied from 11.5 to 13.5 levels, which is a rapid spike in a span of just one week. During this election phase, the VIX has been surprisingly subdued, but it remains to be seen if the last week’s spike in VIX was a one-off event or a signal of the higher volatility expected in markets.
• What does all this mean for the market levels. As far as the Sensex is concerned, a lot will depend on 72,500 and 73,000 holding; while 75,000 will be the key resistance level. For the Nifty, the key supports are at 21,800 & 21,500. However, the make or break level for the Nifty will be 22,000. Holding above this level with volumes support will reassure the markets about higher levels.

To sum up, we are entering a critical week with election uncertainty, FPI selling and geopolitical risk. This week could set the tone for the market journey till monsoons.