Market outlook for the next week (January 29-February 02)

29 Jan 2024 , 09:29 AM

UNCERTAINTY TAKES ITS TOLL ON INDIAN MARKETS

The previous week did not see a very sharp correction. The Nifty and the Sensex fell a little over 1% while the mid-cap index fell about 1.8% during the week. However, what stood about the week was that there were really not redeeming themes. The markets saw selling across the large cap and the mid-cap themes. The markets also selling across the sectoral themes. While banking continued to be under pressure, even the other sectors like IT and oil & gas (which have attracted buying in recent weeks) came under pressure. What was the trigger for this sharp correction. The answer was an elevated level of uncertainty.

Firstly, there is uncertainty over the nature and colour of the Union Budget. Investors are not too sure if the government will treat the interim budget like a full budget or as a vote on account. Within the contours of the Union Budget, there is uncertainty over whether the budget will focus on capex or on fiscal prudence. Incidentally, both are priorities. Secondly, there is uncertainty over the Fed policy. In the coming week, the Fed is likely to announce the first monetary policy of 2024. While static rates are taken for granted, the market is not clear whether the Fed would actually go ahead and announce a time table for rate cuts.

Thirdly, there is the uncertainty over the domestic data. India is likely to see the announcement of the core sector data growth for December and the updated fiscal deficit position during the week. It is not clear how these variables have progressed in the latest month. Fourthly, there is the uncertainty over the RBI monetary policy scheduled for the next week. The markets are not yet clear if the RBI policy will wait for the Fed to take a lead on rate cuts or chart its own path. Finally, and above all, there is a huge uncertainty over oil prices and that is certainly taking a toll on the markets. In short, it is all about uncertainty!

TRUNCATED BUT BUSY WEEK FOR MARKETS

The previous week to January 26, 2024 was a truncated week, which just about  3 days of trading. However, if we were to break it up, there were 7 broad factors that had a rather deep impact on the colour and direction of the Indian equity markets. 

1. Crude oil was the big story. It hovered around $80/bbl through the week but towards the end of the week it spiked to $83.55/bbl. It is the highest level in the last 7 weeks. The situation in the Red aggravated after Houthi Rebels shot and damaged a Trafigura cargo ship. Trafigura is one of the largest oil traders in the world and, along with Vitol, they are likely to take the longer route via Horn of Africa. That would mean higher crude prices and steeper freight and insurance costs. The second factor aiding the rise in crude prices was the better than expected GDP in the US for the fourth quarter. At 3.3%, it was nearly 130 bps better than Bloomberg estimates and 100 bps better than the Atlanta Fed GDP estimates. Stronger GDP has caused an expected-demand driven spike in oil.

    

2. PCE inflation for the US economy for December 2023 came in flat at 2.6%. That was not the big takeaway. The energy inflation was sharply higher on the back of the Red Sea crisis; but both food inflation and core inflation showed a lower trend. That means, adjusted for the Red Sea effect, the PCE headline inflation is actually lower than the 2.6% level indicated. It also means that the US economy may be firmly and assuredly moving towards the 2% inflation mark, which is their eventual target for inflation. That was seen as a positive factor for the Indian markets.

    

3. First advance estimate (FAE) for Q4 US GDP came in higher at 3.3%. One can argue that this is the first advance GDP estimate and hence one has to wait for the second and third estimates. However, the past experience is that when the first advance estimate id 130 bps higher. The final result can vary only marginally from these numbers. Clearly, the GDP has not only surprised the markets, but it has surprised the economists too. It is an indication that the US economy has not only avoided a hard landing, but has actually achieved a soft landing. That means, the US economy has managed to maintain its growth momentum, even as inflation was tamed; paving the way for Fed to cut rates. 

    

4. FPI numbers for the week were on the net selling side, but almost as intense as the previous week. FPIs sold $1,706 million of net equities in the latest week, after selling to the tune of $2,033 million in equity markets in the previous week to January 20, 2024. The last three weeks of FPI selling comes after almost 10 consecutive week of FPI buying and more than $10 billion infused into Indian equities. The FPI selling in the latest week was triggered by two factors. Firstly, there lower than expected numbers reported by major Indian companies, with other banks also joining HDFC Bank in correction mode. Secondly, the uncertainty ahead of the Union Budget and the Fed policy has kept the FPIs on tenterhooks. Both these factors were responsible in triggering a sell-off in Indian equities. In the last 3 weeks, FPIs have been net sellers to the tune of nearly $4 billion. However, the FPI selling in equites was largely offset by FPI buying in debt.

    

5. The Red Sea crisis continued to be the biggest threat to world trade and for the rupee sentiments. Houthi rebels have directly hit the oil market where it hurts by firing at Trafigura tankers. The extent of damage is not known, but it has surely damaged sentiments. Two of the world’s largest oil traders viz., Trafigura and Vitol have decided to take the Horn of Africa route and avoid the traditional Red Sea route. However, that would mean more time, more movement costs and eventually higher oil prices. That is likely to keep oil on the boil, but there are also worries that this crisis could spill over and bring in more countries into the ambit of a war. If the US and Israel continue to fire at Houthi rebels in Yemen, then the Arab world cannot remain neutral for too long. The concern is that if this spreads from the Gulf of Aden to the Hormuz Straits, then the impact on oil trade could be a lot more serious. For India, the immediate concern is that it could hit exports to the tune of nearly $30 billion in FY24.

    

6. The twin global macro variables of US bond yields and dollar index continue to remain in focus, especially of the first Fed policy announcement latest this week. During the week, the US bond yields rallied from 4.10% levels to 4.14% levels and that continued to FPIs on tenterhooks, although the impact was nowhere close to the previous week’s spike in bond US bond yields. The dollar index stayed between 103 to 104 levels and that is likely to keep the rupee under some bit of pressure. The twin factors of US bond yields and the dollar index were not too volatile this week and that was evident in the form of limited impact on the CME Fedwatch during the week.

    

7. Finally, the one event that took a sentimental toll on the markets was the failure of the Zee Sony deal. During the week, Sony decided to officially walk out of the merger deal and now the legal battle is about to begin. While Sony has sought damages of $90 million from Zee for not honouring their part of the contract, Zee has approached the NCLT to force Sony to go ahead with the merger. The deal was supposed to be the start of consolidation of the media sector in India, but that is obviously not happening any time soon. That did impact sentiments in the market.

The coming week will be all about the budget announcement and the key policy statement by the US Federal Reserve.

STOCK MARKET TRIGGERS FOR COMING WEEK TO FEBRUARY 02, 2024

Here are some key factors that will have a bearing on stock markets for coming week.

1. Nifty closed the week with losses of -1.02%, Sensex also fell -1.01% and the Nifty Next-50 closed -0.80% lower. The frontline indices were hit by a mix of FPI selling and a spike in oil prices. However, the Mid-cap index also fell by -1.78% while the small cap index closed -0.71% lower. Clearly, the pressure on the smaller stocks is quite evident and the bias is likely to shift to the larger stocks in the coming week.

    

2. It is going to be a week of major results announcements and probably will get through with the most important quarterly results for Q3FY24. The major large cap results to be announced for Q3FY24 in this week include ITC, Bajaj Finance, L&T, Sun Pharma, Titan, Maruti, Adani Ports, BPCL, Adani Enterprise, Reddy Labs. In the mid-cap space, the key results will include companies like Adani Total Gas, Cochin Shipyards, Piramal Pharma, Strides Pharma, Voltas, BOB, Dabur India.

    

3. The biggest news of the week will be the presentation of the Interim Budget on Thursday by the Finance Minister. Despite being an interim budget, the Finance Minister is expected to focus on measures to boost consumption, enhance the capex spending and also cut fiscal deficit to 5.3% for FY25. That may look like a daunting task, but the success of the interim budget will depend largely on how these items are balanced.

    

4. FOMC decision on rates will also be out in the form of the Fed statement on January 31, 2024. For starters, the Fed is expected to keep status quo on rates but the markets are expecting rate cut timetable after solid Q4 GDP numbers. Markets believe that the strong Q4 GDP and the stable PCE inflation, provide the Fed the right environment to announce a time table for rate cuts. We have to wait and see.

    

5. In terms of macro news flows, India will see the Infrastructure (core) sector output announced on Wednesday. With a higher base, the core sector is likely to stabilize around the 7.8% level or even trend lower in December. At the same time, the Controller General of Accounts (CGA) will also update fiscal deficit status at the end of December 2023. There could be a spill over by about 10 bps in FY24.

    

6. FPIs sell $1.71 billion in equities in a truncated week of just 3 trading. This takes the total FPI selling up to nearly $4 billion in the last two weeks, largely on the back of tepid Q3 results and an oil price spike. Incidentally, the next week is likely to see sustained pressure on Brent crude after it closed at $83.55/bbl towards the end of the week. The low PCE inflation and strong GDP data is likely to be positive for crude prices.

    

7. Key US market data points for the week include Fed Rates. JOLTS, API stocks, initial jobless claims, PMI, construction spending, factory orders, vehicle sales. In other markets, it is HCOB, GDP, consumer confidence in the EU; retail sales, unemployment, and PMI in Japan; while for China it is PMI and for the UK it is PMI and BOE rates.

For this week, the big triggers will be the Union Budget and the Fed policy to watch out for.

NIFTY AND SENSEX TO BE IN A TIGHT RANGE THIS WEEK

Nifty has support at 21,300 and resistance at 21,500 levels. The Sensex is also expected to be in a range of about 600-700 points this week. However, with the VIX at 13.87, one can expect a tight range for the Nifty, with upsides likely only beyond 21,700 levels, if breached with volumes. Most of the risks appear to be factored into market prices. However, the sentiments this week will be driven by the Budget reading and the Fed data interpretation.