Market outlook for the next week (26-Aug to 30-Aug)

26 Aug 2024 , 07:30 AM

SECTORAL STORY IN THE WEEK TO AUGUST 23, 2024

The week to August 23, 2024 saw the Nifty and the Sensex closing with gains, thanks to the dovish undertone of the Fed minutes as well as Jerome Powell’s rather explicit commitment to cut rates in September at Jackson Hole. The FPIs sustained turned net buyers in the week to the tune of $584 Million, after these FPIs had sold about $2.70 Billion of equities in the three weeks prior to that. But what really tipped the scales in the week was the unequivocal signal that the time was ripe for rate cuts in the US. Here is a quick look at how the 20 key sectors performed in the week to August 23, 2024.

Sectoral Index	Weekly Returns	Index (23-Aug)	Index (16-Aug)
Nifty Metals	3.30%	9,290.50	8,994.10
Nifty Consumer Durables	3.16%	40,926.60	39,671.50
Nifty Non-Banks	2.85%	25,739.39	25,026.38
Nifty PSU Banks	2.54%	7,017.70	6,843.80
Nifty FMCG	1.92%	63,409.25	62,213.00
Nifty Mobility	1.75%	22,258.27	21,874.64
Nifty Healthcare	1.59%	14,100.85	13,879.55
Nifty Energy	1.35%	43,338.15	42,762.70
Nifty Infrastructure	1.25%	9,271.95	9,157.90
Nifty Oil & Gas	1.08%	13,140.45	12,999.75
Nifty India Digital	1.08%	9,299.80	9,200.40
Nifty MNC	1.04%	30,905.15	30,587.35
Nifty Logistics	1.03%	24,916.14	24,660.99
Nifty Automobiles	0.99%	25,850.70	25,597.35
Nifty Private Banks	0.98%	25,502.85	25,256.05
Nifty Banks	0.82%	50,933.45	50,516.90
Nifty IT	0.52%	41,089.85	40,878.25
Nifty CPSE	0.41%	7,333.80	7,303.65
Nifty India Defence	-0.90%	7,083.03	7,147.24
Nifty Realty	-2.91%	1,018.10	1,048.65

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 23, 2024. Out of the 20 key sectors, the gainers managed to dominate the week. While 18 sectoral indices gave positive returns for the week, only 2 sectors recorded negative returns. However, even among the sectors that gave positive returns; 13 out of the 18 sectors gained more than 1%. Clearly, the tentativeness and ambivalence of the previous week has given way to a much higher degree of confidence and optimism in the current week.
• Let us start with the story of the top gaining sectors for the week. Nifty Metals with 3.30% gains, Nifty Consumer Durables with 3.16% gains, Nifty NBFCs with 2.85% gains and Nifty PSU banks with 2.54% gains flattered the street in terms of positive cues. There were 9 sectors giving between 1% and 2% in the week, a clear indication of gains being more spread out compared to the previous week. Among the big gainers, metals was emerging as a play on weak dollar while consumer durables, NBFCs, PSU banks, and FMCG were signals that the defensives were still the preferred choice for investors.
• What about the sectors giving negative returns. There were a total of 2 sectors giving negative returns in the week, out of which Nifty Realty was the big loser at -2.91%. The realty sector has been under pressure ever since the July full budget withdrew the indexation benefit on sale of real estate. The markets are unhappy even through the tax rate on long term capital gains on real estate was cut from 20% to 12.5%. Back of the envelope calculations show that property sellers will end up losing money. Even the feeble attempts by the government to offer sops has not helped. The other sector on the losing side was defence, which continues to be under selling pressure.
• With 18 out of 20 sectors giving positive returns in the week, the arithmetic average of returns of these 18 gaining sectors stood at 1.54%, while the arithmetic average of the 2 losing sectors stood at -1.91%. Of course, this is more of a statistical distortion due to the limited number of losing sectors.

During the week, the Nifty VIX moderated to 13.5 levels; but it is still not low enough to warrant a buy-on-dips strategy. The VIX will have to 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 30, 2024, FPIs turned net buyers to the tune of $584 Million. FPIs were net sellers for 3 weeks in a row, during which time, they took out $2.70 Billion from equities. However, in the 6 weeks after the Modi 3.0 government formation, the FPIs had infused a whopping $9.04 Billion. The big story this week came from the Fed.

• RBI Monetary Policy Committee (MPC) minutes were put out in the week, 14 days after the RBI statement. It may be remembered that the RBI had maintained status quo on rates and had refused to commit anything on rate cuts due to the high food inflation levels. However, it remains to be seen, if the MPC can afford to remain stoical if the GDP numbers for Q1FY25 show pressure. In the latest MPC meet, 2 out of the 6 members of the MPC voted for 25 bps rate cut and a shift in the stance from “Gradual Withdrawal of Accommodation” to “Neutral”. However, the RBI members of the MPC are still too cautious about the inflation monster. To quote the RBI governor; RBI would will continue to be inflation above all else. Hopefully, this view could change once the Fed embarks on the first rate cut in this cycle in September.
• FPIs were net buyers in 3 days this week and net sellers for 2 days. However, at an overall level, they managed to infuse $584 Million into Indian equities. With the US authorities turning moderately dovish, there was some respite for the FPIs. However, FPIs continue to be cautious on India for two reasons. Firstly, valuations in the Indian markets are still fairly stretched compared to its Asian peers. Secondly, Q1 corporate results felt the pain of higher cost of funds and hence FPIs would be keen to see the RBI time table on rate cuts.
• The FOMC minutes and the Speech by Jerome Powell at the Jackson Hole Symposium were the big talking points of the week. Let us talk about the FOMC minutes first. In the Fed minutes, there was a high inclination to cut rates, although the hawks in the FOMC like Raphael Bostic and Michelle Bowman continued to suggest a slow and cautious path in tacking inflation. However, if there were any doubts about the timing of the first rate cut by the US Fed, it was set to rest by Jerome Powell in his speech at the Jackson Hole Symposium. Powell was almost unequivocal at Jackson Hole that the time was ripe for cutting rates. However, Powell has not committed anything beyond the first rate cut in September.
• The dollar index weakened sharply to a 1 year low of 100.68 during the week after there was ample clarity that the first rate cut would happen in September 2024. That was a direct outcome of the falling bond yields in the US, but it had an impact on the prices of two key asset classes. Oil prices showed a late rally in the week after the dollar index tapered to a 1-year low. At the same time, the price of gold also firmly ensconced itself above the $2,500/oz mark. This is the index to watch out for in the coming weeks.
• The massive divergence between the Fed outlook at the CME Fedwatch continued and the gap is only getting wider. The FOMC minutes and the speech delivered by Powell at Jackson Hole, put together, have committed nothing more than the 25 bps rate cut in September 2024. Powell even asked the markets not to expect anything more in 2024. However, the CME Fedwatch appears to be ultra-dovish. It is expecting 3 to 4 rate cuts of 75 bps to 100 bps in 2024 and an additional 4 to 5 rate cuts in 2025. If the CME Fedwatch is to be believed, the US interest rates should be in the range of 3.00% to 3.50% by end of the year 2025; which does look tad aggressive.
• A key factor influencing stock market action will be two sets of data announced in the week. Firstly, data from the NSE shows that the overall market cap of PSUs on the NSE has gone up from 11% to 15% in last 2 years. Clearly, short on PSUs and long on private sector looks like the low-hanging fruit. Also, there are key index changes in the Nifty. Bharat Electronics Ltd and Trent Ltd will enter the Nifty 50 in place of Divi’s Laboratories and LTI Mindtree.
• The rupee spent a volatile week, but managed to show strength towards the end of the week. For the last couple of weeks, the RBI was defending the rupee at 84/$, but with the dollar index falling sharply, the pressure on the rupee should be lower. A lot will now depend on how the crude oil prices pan out and how the FPI flows into Indian equity and debt pan out in the coming weeks.
• Last, but not the least, auto demand seems to be under pressure. According to data published by the Federation of Automobile Dealers Association (FADA), there is an unsold stock of 7.30 Lakh vehicles with dealers. That is forcing big players like Maruti Suzuki to tweak their output to match with weaker sales. This space needs close monitoring in the coming weeks.

The coming week will be about India cues like Q1FY25 GDP, core sector and fiscal deficit update. The big US cues will be about the second GDP update for Q2 and PCE inflation.

STOCK MARKET TRIGGERS FOR COMING WEEK TO AUGUST 30, 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 30, 2024.

• Let us start with the outlook for the key indices next week. Last week the Nifty was up +1.15%, Sensex up +0.81%, and NSE Next-50 was up +2.00%. This bounce was triggered by the dovish vibes coming from Fed minutes and Jackson Hole. Among smaller indices, the mid-cap index was +1.56% up and small cap index surged +3.48% during the week. This was the first sign of alpha hunting coming back and is a good sign for markets.
• The big corporate event this week will be the Reliance 47th AGM. Apart from the outlook for new energy, markets will also look for cues on the listing plans of Jio Infocomm and Reliance Retail Ventures. Among other corporate updates, the week will see dividend record dates for Manappuram Finance, Jai Corp, Suprajit, Bajaj Steel, ITDC, JSL, MOIL, Oil India, PFC, Sarda Energy.
• The big data point this week will be the Q1FY25 India GDP growth. Markets are already expecting some pressure on growth, but the real question is how much lower it would be compared to 7.8% reported in Q4FY24. The other big data point is the core sector data, which had fallen to 4% in June and is likely to be under pressure in July also due to weak infrastructure spending growth. Also, the 4-month fiscal deficit update will give an indication whether Indian economy is on target for FY25 fiscal deficit at 4.9% of GDP.
• There are 2 key data points from the US this week. The PCE inflation for July 2024 will be the key data point for the Federal Reserve ahead of the likely rate cut in the September 18, 2024 Fed meet. The markets will also watch for cues from the second estimate of Q2-2024 GDP, which had bounced sequentially from 1.4% to 2.8%. Markets will look for assurance that the hard landing has been actually averted.
• The big index to watch this week, in the run-up to the Fed September meet, will be the US dollar index, which has now fallen to 100.68. All eyes will also be on the CME Fedwatch probabilities of rate cuts in the coming year and how it evolves. Dollar index is likely to influence oil price, spot gold prices and FPI flows into India.
• It looks like another busy week for IPOs. Next week, the IPOs of Premier Energies, ECOS Mobility, and Bazaar Style Retail will raise over ₹4,000 Crore between them. The listing candidates in the IPO mainboard next week will be Interarch Building Products and Orient Technologies. The action on the SME segment will continue to be robust.
• Finally, let us to the key global data points for the coming week. Key data points from US markets include PCE Inflation, GDP, durable goods orders, HPI, EIA crude, real consumer spend, jobless claims, and personal incomes. In ROW markets, the key data points are Unemployment, Retail Sales, Housing starts, and construction orders (Japan); EIS Sentiments, Inflation flash, and Unemployment rate (EU).

Overall, the coming week promises to be heavy on data flows; with the India GDP growth and the US PCE inflation holding the key to the market sentiments.

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 remained slightly elevated to close at the 13.55 levels. The experience of the previous week showed that the tendency of the VIX to remain very volatile and disruptive may prevent the markets from finding a temporary bottom.
• On the Nifty, the 25,500 level is likely to be a stiff resistance, although 24,900 will be the immediate resistance for the Nifty. It has long term support at 22,500 and the current rally price structure gets damaged only below that level.
• Sensex closed the week above 81,000, but 82,500 will be the key barriers for the Sensex. Sensex has found support in the 78,000-79,000 range. However, markets are likely to get a leg up, only if the RBI also follows the US Federal Reserve on rate cuts.