Market outlook for the next week (July 17 to July 21)

17 Jul 2023 , 06:52 AM

That was the level where the short covering post the rally had fizzled out. However, in the latest week to July 14, 2023, the Nifty scaled life-time highs to close at 19,564 levels. Most of the rally came on Friday with the IT stocks leading the rally. In the week, the FPIs infused another $1.06 billion into Indian equities taking the total FPI infusion to $3.73 billion in the first half of July. The Nifty is now in totally uncharted territory and would now be driven by the extent and colour of FPI flows. Of course, the FOMC meeting on July 26, 2023 will remain a major trigger for the markets.

News flows from the previous week to July 14, 2023

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

1. CPI inflation came in sharply higher at 4.81% for June 2023 compared to 4.25% in May 2023. This has taken the RBI farther from its 4% inflation target. However, the markets were not overly worried as they saw this as merely a temporary phase in markets.

    

2. If the CPI inflation had disappointed, the IIP growth gave reason for celebration as it bounced to 5.2%. More importantly, manufacturing bounced sharply and in terms of user industries; both capital goods and consumer goods saw robust demand.

    

3. The latest trade data for June saw merchandise trade deficit narrowing to $20.2 billion. However, the global recession fears have also reduced the services trade surplus. However, markets would be happy that CAD for the year would still be under 2% of GDP.

    

4. Overall, the markets were enthused by FPI flows of $1.06 billion in the week. The inflows were lower than in the last few weeks, but the sharp demand for IT stocks on Friday showed that the markets expect Indian IT to catch up with NASDAQ rally.

    

5. Of course, the big news in the week was the US inflation falling by 190 basis points in just 2 months to 3%. It is now just 100 bps from the Fed target. While it toughens the relative economics for India, it also raises the probability of a Fed pause in rate hikes.

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. That was evident in June food inflation number. Secondly, crude oil has bounced sharply to almost $80/bbl amidst concerns over falling US inventories. Also, OPEC is sticking to its supply cuts and Russia is likely to join in. Lastly, the decision by Foxconn to walk out of the Vedanta JV is a signal that India’s chip plans may not be as smooth as imagined. We have to wait and watch. 

Stock market triggers for the coming week to July 21, 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.

• Nifty closed the week +1.20%, Nifty Next 50 closed +0.55%, Nifty Mid-Cap 100 closed +1.25% and the Nifty Small Cap 100 closed +1.85%. The action was still focused on the Nifty stocks and IT was the hero of the week leading the rally despite weak results by IT bellwethers. However, the smaller stock indices also attracted a lot of alpha related buying and that is expected to continue in the coming week also. 

   

• If the previous week was all about IT bellwether results, there are some very important results coming out this week. The results of HDFC Bank this week assume importance in the light of the merger. Also, RIL results will come a day after the demerger adjustment. Among other large cap results expected this week are LTIM, Kotak Mahindra Bank, Ultratech Cements, Havells, Hindustan Unilever, Infosys, DLF, ICICI Bank, and IndusInd Bank. Key mid-cap results this week will include ICICI Prudential Life Insurance, HDFC Life Insurance, Hindustan Zinc, Ashok Leyland, Glenmark Life, Union Bank, and Mphasis.

   

• FPIs flows have been the big story in the last 10 weeks. They have infused close to $15 billion in the last 75 days and have brought in $3.73 billion in the first half of July 2023. With 2 more weeks to go for the month of July, the FPI flows look all set to better the $5.5 billion average of the last two months. Of course, FPIs would be largely driven by the upcoming results in the coming week.

   

• Two major stocks will be in focus this week and they are largest and the third largest by market cap in India. HDFC Bank, the third largest by market cap, relists its shares with an expanded capital base on Monday July 17, 2023. It remains to be seen whether the stock faces pressure with a substantial expanded capital base post-merger, or whether the synergies of merger with HDFC Ltd gets the better of such concerns. The other stock is the most valuable stock of Reliance Industries. The demerger record date is set for July 19, 2023 and it goes ex-demerger on July 20, 2023. The market will focus on how the stock handles the price adjustment post the removal of the financial services business.

   

• Two global data points will hold the key this week. Firstly, Brent crude has already inched closer to $80/bbl on sharp fall in US inventories. Equity markets generally face pressure when crude prices cross $80/bbl and it is almost there. The other factor will be the USDINR, which has settled at Rs82.20/$. While the weak dollar (after the lower US inflation) has kept rupee stable, crude prices would hold the key to USDINR this week.

   

• China demand and domestic inflation would be two variable on watch. Indian metal companies may face pressure this week on the China trade story. For June 2023, China reported one of the sharpest slowdowns in its exports and imports, hinting at very weak global demand. On the other hand, vegetables inflation continues to soar in India with larger implications for food inflation in the coming months. That will be tracked closely.

   

• There is some action visible on the IPO front, although there is still no deluge of IPOs. Last week, Utkarsh Small Finance Bank closed with hefty oversubscription. The coming week will see the IPO of Netweb Technologies opening for subscription, and the anchor allocation of 30% hints at robust demand. The Rs631 crore IPO of Netweb will be the only mainboard IPO, but action continues unabated on the SME IPO front.

   

• What about the Nifty range for the coming week? Nifty range once again gets into uncharted territory in coming week since there is really no chart history at 19,564. What may matter is that till now sector rotation has helped the Nifty and last week it was the IT sector. With VIX still at around 10.65, all eyes will be on the Bank Nifty, which has been quite silent for a long time. 

   

• Finally, let us look at some of the key global data points from the US markets that could have a bearing on the Nifty trajectory this week. The major US data points include Core retail sales, IIP (MOM / YOY), building permits, housing starts, API crude stocks, and existing home sales. In addition, there are also some major cues coming from the rest of the world. From the EU, we can watch out for ECB speak and CPI inflation. From Japan we observe the trade balance and retail inflation while China GDP, IIP and unemployment will also be in focus. In triggers from the UK, we look at MPC (Monetary Policy Committee) speak, CPI inflation, PPI, and retail sales.

In terms of macro data flows, this is likely to be an easy week. All eyes will be on quarterly results, HDFC Bank relisting, Reliance demerger and FPI flows.

How we see markets shaping up in the coming week

In the last 3 weeks, the Nifty has seen a frenetic rally from around the 18,600 levels to the 19,564 levels with little friction. It has almost traversed almost 1,000 points led by constant sector rotation and strong FPI flows. The rally beyond 19,500 shows that the story now is more of sector rotation and less of short covering. With the Nifty and the Sensex already in uncharted territory, the major triggers now would be news flows and FPI flows. In addition, the low VIX of 10.65 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. It has broken above the 19,500 level and now the real point of interest is whether the Nifty holds above 19,500 on a closing basis. It also looks like sector rotation has taken over from short covering as the key driver of the Nifty move. For now, the options data is suggesting a broad support of 19,400 to 19,500 with a good chance of the Nifty breaching above the 20,000 mark. That may not happen in this week, but the building blocks are set.