Market outlook for the next week (August 07 to August 11)

7 Aug 2023 , 09:11 AM

The latest week to August 04, 2023 was the second consecutive week of negative returns. After falling 50 bps in the previous week, the Nifty fell 66 bps in the current week. While the Nifty level of 20,000 has remained a resistance for the last 3 weeks, this week saw the Nifty dipping as low as 19,300 before showing a late bounce and settling above the 19,500 mark for the week. In terms of data flows, the recent week was largely non-eventful, although Fitch downgrading US debt by one notch from AAA to AA+ did have an impact on the US markets. However, it did impose collateral damage on emerging markets like India.

The downgrade by Fitch had its critics too. The likes of Janet Yellen and Larry Summers called the downgrade out of sync with reality. Even independent observers like Mohammed El Erian and Palu Krugman had their own doubts about the validity of such downgrades. However, the impact on emerging markets was undeniable. After all, such a move would lead to risk-off flows and that was evident in the FPI flows turning negative for the week, after a very long time. Oil prices in the Brent market rallied and the rupee fell sharply during the week; and both these data points did not help FPI flows.

News flows from the previous week to August 04, 2023

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

1. The big event of the week was US rating downgrade by Fitch. The impact on the US markets was very limited as most experts felt it was unwarranted at a time when the debt ceiling issue had been adequately addressed. Also, US had managed to contain inflation without impacting the growth engine. In these circumstances, downgrading US debt ratings looked disproportionately harsh and even incongruous. However, the pressure on the EM flows and passive flows did continue in the week.

    

2. Crude oil and rupee weakness were two addition data points in the week. Brent Crude got close to $86/bbl while the rupee sharply weakened to Rs82.75/$. The oil spike was an outcome of supply constraints coming from the Middle East and Russia, although this could reverse if growth did not pick up in the EU and China. The rupee fall was an outcome of higher oil prices and the US rating downgrade. Even as the US debt got downgraded by Fitch, the Dollar Index rallied, putting additional pressure on the rupee.

    

3. Banking sector results continued to flatter on the upside. Bank of Baroda posted profit growth of around 80% while the net profits of SBI more than doubled in Q1FY24. Net interest income (NII) growth in the quarter continued to be robust, but the pressure was visible in flattening of net interest margins (NIMs). However, the Bank Nifty fell sharply during the week as the Fitch downgrade had a negative impact on financials overall. In India, it was only the IT index that managed to deliver stellar returns during the week.

    

4. Core sector growth for the month of June 2023 came in sharply higher at 8.2%. The bounce in the core sector basket was led by sectors like steel, cement, power, and coal. Now, all these four core sectors have very strong externalities in terms of the multiplier effect on GDP growth overall. The spike in core sector growth is a signal that the government spending on infrastructure is delivering the results in terms of downstream growth in connected sectors. Hydrocarbons related sectors were under pressure.

    

5. In what could be a significant announcement for stock market valuations, Reliance Industries announced mega plans to double its valuation from $200 billion to $400 billion by the year 2027. This is expected to be achieved by progressively hiving off its digital business and the retail business into separate entities on the lines of Jio Finance. If it works, it would become a sort of paradigm for companies in India on how to plan value accretion. That thought process was triggered during the recent week.

In terms of actual data points, there are 3 things Indian markets would be worried about. The first is inflation. Rainfall deficiency combined with flooding in several parts and such erratic behaviour damaged crops and spiked food inflation. In June, the CPI inflation had spiked to 4.8% and economists are already estimating the retail inflation to go back to 6% levels in July and August 2023. The second concern is with respect to Nifty levels. It is a rather strange combination of Nifty at peak levels but VIX at a low of 10.57. While this hints at a buy-on-dips market, it also implies that the shift from enthusiasm to fear can quite rapid in the market. The third risk is persistent dollar strength. That is likely to be accentuated by the recent Fitch downgrade of US debt. While a strong dollar tends to keep oil prices in check, it also leads to weakening of the rupee.

Stock market triggers for the coming week to August 11, 2023

Here are some key stock market triggers to watch out for in the coming week, which could impact the colour and direction of the market move.

• For the previous week, Nifty closed -0.66% down, Nifty Mid-cap index closed +0.73% higher while the Nifty small cap index was higher +0.84%. The pressure on the Nifty came principally from the banking stocks and the FMCG stocks which witnessed extensive price correction in the week. IT was the sole saving grace. However, small, and mid-cap stocks continued to attract a lot of buying interest as alpha hunting remains the name of the game, at the time when large cap opportunities are plateauing. 

   

• This will be the last big week of quarterly results with more than 1,800 companies likely to announce their quarterly results in this week. Some of the major large cap names announcing results this week include Adani Ports & SEZ, Coal India, Hindalco Industries, Grasim Industries, LIC, Hero Motocorp, ONGC and Apollo Hospitals. Some of the mid-cap companies announcing results include Tata Power, Bharat Forge, Aurobindo Pharma, Oil India, Emami, Gland Pharma, Berger Paints, Bata India and Biocon.

   

• After weeks of FPI inflows into Indian equities, the latest week saw FPIs net sellers to the tune of $95 million in Indian equities. While FPIs have infused $17 billion in the last 3 months, the momentum appears to be slowing and that is likely to be the paradigm in the coming week too. The FPI selling is likely to just get accentuated in the light of the Fitch’s decision to downgrade US debt from AAA to AA+. Whie impact on US will be limited, the emergence of risk-off flows is likely to have an impact on EMs like India.

   

• Two diverse but highly important data points will be announced in the coming week. The RBI announces its monetary policy for August on Tuesday while the US inflation number will be put out on Thursday. While the RBI is expected to hold repo rates at 6.5%, the language of the RBI would be critical in the light of rising inflation in India. That inflation trend is likely to continue in July and August also. The US inflation data is expected to dip below 3%, which could create a problem for India in terms of real interest divergence.

   

• Oil prices will continue to hold the key for Indian markets with Brent Crude prices hovering around $86/bbl. Oil prices have spiked from $71/bbl to $86/bbl in the last 4 weeks. For now, demand situation is uncertain, but supply constraints are real. For India, any oil price above $80/bbl is a matter of concern. With Indian refiners relying on imports for more than 85% of their daily needs, global crude oil prices have the potential to become a source of imported inflation for India. 

   

• As the results season concludes in the next few weeks, the action shifts to the corporate action. Here is a list of stocks that have their dividend payment record dates in the coming week. These stocks include RITES, Castrol, ICICI Bank, Motherson Sumi, Alkem Labs, Bandhan Bank, and Bharti Airtel among others. The IPO action nis back with 2 mainboard IPOs of SBFC Finance Ltd and Concord Biotech Ltd closing for subscription in the coming week. At the same time, the IPO of TVS Supply Chain solutions will open for subscription in the coming week. IPO action appears to be back with a bang next week.

   

• Last week saw a bearish candlestick created on the Nifty charts and that can only be reversed if the Nifty consistently sustains above 19,500 levels. For the close of the week, the call writing hints at resistance for the Nifty at 19,650 to 19,850 zone with 20,000 being the last major resistance. With 20,000 being the resistance for the Nifty over the last 3 weeks, that is not going to be breached so easily. However, VIX at 10.57 is a consolation factor, although such low VIX at Nifty peaks can trigger market shifts.

   

• Finally, let us quickly look at the key data points from US markets to be keenly watched in the coming week. These include Bowman speak, Hartman speak, balance of trade numbers for June, wholesale inventories, API stocks, July inflation, initial jobless claims, and July PPI data. July inflation will be the big story. In terms of cues from other countries, investors cand traders can keep an eye on BOJ summary, household spending and machine tools orders in Japan. In addition, one can also track UK GDP and IIP, as well as China Trade, inflation PPI, vehicles sales etc.

In terms of domestic macro data flows next week, the RBI policy will be the big story of the coming week while US inflation will be the big global focus.

How we see market levels shaping up in the next week

In the previous 4 weeks, Nifty traversed over 1,400 points from the 18,500 levels to the 19,980 levels with virtually little resistance along the way. Sector rotation has been a key the markets in the current market conditions. Nifty 20,000 may look just a stone’s throw away, but it needs a very good and solid story to scale that level. After all, the Nifty and Sensex are in uncharted territory, so the leadership will come from news flows and FPI inflows. VIX does look attractive at 10.57, but as we have seen in the past; a combination of elevated levels of the Nifty and low VIX can misfire quite often.

Over the last 5-6 weeks, the Nifty broke through multiple resistances levels like 18,600, 19,000, 19,500 and 19,800. While the RBI monetary policy and the US inflation will be the major trigger points, it must be said that Q1FY24 results have been better than expected in most sectors. For now, the Nifty and the Sensex are in uncharted territory. The level of 20,000 is more of a psychological barrier. Beating 20,000 will not be easy. It will need a proper price-wise and a time-wise correction before it can decisively go above that resistance level.