Market outlook for the next week (July 10 to July 14)

10 Jul 2023 , 07:55 AM

This was despite nearly $2.67 billion of FPI flows coming into the equity markets during the week. The week also saw a sharp spike in the Brent Crude oil prices, which led to the Indian rupee weakening to the Rs82.7/$ levels. Above all, it was a case of the market tiring at higher levels after a very sharp rally. The last leg of short covering appeared to peter out in the range of 18,400 to 18,500 of the Nifty.

News flows from the previous week to July 07, 2023

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

1. FPI flows continued to be the big booster. After infusing $11 billion in May and June combined, the FPIs infused another $2.67 billion in the first week of July. FPIs continue to buy heavily into financials, auto and capital goods.

    

2. The FOMC minutes were announced in the previous week with the broad consensus still hinting at more rate hikes. However, the members also agreed that rate hikes need not be front-loaded and could be now done in a phased manner over a period of time.

    

3. The pre-results sales guidance has already started and the early numbers hint at strong top line growth in Q1FY24 also. More importantly, rural sales are expected to bounce back to positive after 6 consecutive quarters of negative growth in rural sales.

    

4. In a case of feel good factor for markets, the BSE market cap crossed Rs300 trillion for the first time ever. More interestingly, the journey from Rs200 trillion to Rs300 trillion took just 2 years to traverse with bulk of the value from domestic plays.

    

5. The week saw Brent Crude prices spiking from $74 to $78.50 after US inventories fell sharper than expected. Also, the US is planning to add 6 million barrels to its strategic petroleum reserves and that has kept prices on the higher side.

Amidst this general positive trend, there were 3 concerns for the markets. Firstly, while the rainfall deficiency has been covered, paddy sowing is impacted and that could impact food inflation. Secondly, global central banks are still hawkish and that concern is reflected in the form of bond yields in India inching higher to the 7.16% levels. Finally, concerns of a global trade war are back on the radar after China put a ban on the export of metals used globally in the manufacture of microchips. That is likely to worsen trade relations between the US and China and have larger global trade repercussions.

Key stock market triggers for the next week

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.

• The Nifty faced resistance in the range of 19,400 to 19,500 and in the absence of fresh triggers, the Nifty may struggle to break above this level. For the week, the Nifty and the Nifty Next 50 returns were muted due to the Friday correction. The sole exception was the small cap index which gained more than 2.6% during the week. Alpha hunting in smaller stocks is likely to continue in the coming week also. 

   

• The big trigger for the week will come from the TCS results on July 12, 2023. Key large cap Q1FY24 results are likely to be announced this week including IT bellwethers like TCS, Wipro and HCL Tech; apart from retail giant Avenue Supermarts. Mid-cap names like PCBL, Anand Rathi Wealth, Rallis India, Tata Metaliks, Angel One, Federal Bank and VST will also announce their quarterly results in the coming week.

   

• FPI flows is expected to be robust in the coming week also. However, the real focus will be on specific stories. The Reliance demerger of its NBFC business is likely to be value accretive. ITC is likely to gain from news of its hotel business demerger. Above all, the announcement of the mega NSDL IPO has the potential to actually fire up the mainboard IPO market, which has been seeing tepid supply in the last few months.

   

• This will be a week of big macro data announcements. Let us focus on inflation first. India CPI inflation for June 2023 will be announced on July 12, 2023. While the yoy inflation is likely to remain constant at 4.25%, the MOM (high frequency) inflation is expected to increase by about 20 bps due to short term price pressures in the food basket. Also, the US Bureau of Labour Statistics (BLS) is expected to also announce the consumer inflation data on July 12, 2023. Lower food and fuel inflation and static core inflation is likely to take headline inflation to below the 4% mark.

   

• In manufacturing related data, the Index of Industrial Production (IIP) for May 2023 will be announced on July 12, 2023. Last, month manufacturing had pulled up IIP to 4.2% but that is likely to taper to 1.2% this month on higher base effect according to consensus estimates put out by Bloomberg. Producer prices also matter to the IIP number. For June 2023, the WPI inflation data will be announced on Friday and that is expected to dip lower than the -3.48% reported for the previous month. Fuel prices hold the key to WPI.

   

• Trade data on exports and imports will also be announced on Friday. While the merchandise trade deficit will be closely watched, the real point of interest for analysts would be to check the extent to which the services surplus offsets the deficit in the merchandise trade account. April saw the services surplus fully offsetting the merchandise deficit, but May was a disappointment on both fronts. June holds the key.

   

• All eyes will be on Brent Crude prices that had spiked from $74 to $78.60/bbl last week. With supply likely to remain tight, the prices could inch closer to $80/bbl in the coming week. The impact was visible last week on the USDINR, which fell to 82.7/$ despite robust FPI flows into India. Crude prices will hold the key to the rupee value in the coming week. 

   

• After a bout of fresh buying and short covering, the Nifty faced stiff resistance in the range of 19,400 to 19,500 levels. This is the range where the short covering got exhausted and the markets reversed. For now, that resistance is likely to hold. However, with the VIX at just about 11.5, the downsides would be limited and it will largely remain a buy on dips market.

   

• Finally, there are some global data triggers to watch out for. In US triggers, the focus would be data points like FOMC member speak, CPI inflation, crude inventories, PPI (purchasing power index), jobless claims, Beige Book, trade price index. There are also some key data points from the rest of the world. From the EU it is the IIP, ECB Speak and Trade Balance. Other triggers include Japanese current account, machinery orders; Chinese CPI and PPI as well as UK Bank of England Speak and GDP data.

In terms of macro flows, it is likely to be a data heavy week in terms of domestic and global macros. The key trigger may be the start of the Q1FY24 results season.

How we see markets shaping up in the coming week

In the last two weeks, the Nifty has seen a frenetic rally from around the 18,600 levels to the 19,500 levels with little friction. That was supported by a mix of FPI buying and short covering. The range of 19,400 to 19,500 will remain the resistance level. That is likely to be the pattern in the coming week also. However, the low VIX of 11.5 will ensure that downside risks to the market are limited.

Technically, the Nifty and the Sensex are in uncharted territory and levels may not be too material. However, it is in the range of 19,400 to 19,500 that the short covering showed signs of tiring out and that is now likely to be the resistance level. Even the options data is suggesting a broad support of 19,000 for the Nifty with call writing seen at 19,500 and 19,600 strikes. The coming week is likely to be rather range-bound.