Market outlook for the next week (July 3 to July 7)

2 Jul 2023 , 11:58 AM

For the week ended June 30, 2023, the Nifty scaled life-time highs and closed at 19,189, gaining 2.8% for the week. It breached decisively through the Nifty resistances of 18,800 and 19,000 to close higher with substantial volumes to boot. It was also a week that saw FPI flows of $2 billion with the last day of the month alone seeing $1.8 billion of FPI inflows. The sudden bullish move has put the Nifty and the Sensex in a new uncharted orbit altogether.

News flows from the previous week to June 30, 2023

There were 5 major news items that had an influence on the Nifty scaling new highs in the previous week.

1. FPI flows were the real booster. In June, FPIs infused $5.7 billion on top of $5.3 billion in May, taking the total infusion in 2 months to $11 billion. In addition, FPIs also infused about $2 billion into debt paper, showing all-round India enthusiasm.

    

2. Current account deficit for the March quarter came in sharply lower at just 0.2% of GDP. Even for the full year FY23, the CAD was at $67 billion or 2% of GDP. That is almost half of what the market had estimated during the CAD peak of September 2022.

    

3. The US, despite all the implicit hawkishness in its statements, has shown a sharp revival in growth. The Q1 GDP estimate for the US economy was pegged at 2%, an upgrade of 70 bps compared to the second estimate; an extremely positive development.

    

4. There was a lot of positivity building on numbers ahead of Q1FY24 results which will start in the second week of July. The markets are expecting good numbers from banks, autos and FMCG, while even IT could be better than the last few quarters.

    

5. A stable rupee also helped the market sentiments since it is essential to hold the dollar value of global investments. Apart from the fundamentals, the rupee has also been adequately supported by the timely and limited interventions by the RBI.

Despite these positives, there were some downside risks to the India story too. Firstly, the monsoon progress has been relatively patchy in the week. The IMD continues to insist that the rainfall deficiency had reduced. However, delayed sowing means loss of Kharif output and that raises the spectre of food inflation once again. Secondly, global hawkishness is still on and that was also evident in the week as the bond  yields inched up towards 7.11%.

Major 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.

• Let us start with the index triggers first. In the previous week, the Nifty closed 2.80% up at 19,189 while the Nifty Next 50 also closed +2.14% higher. Even the mid-caps and the small gaps gained by 2.74% and 2.00% respectively. The focus in the coming week is likely to remain on the Nifty with the large caps continuing to rule the roost. However, the mid-caps and small caps could also attract attention from HNIs and domestic funds.

   

• Could IT sector be the X factor in the coming week. The Nifty IT Index gained a whopping 3.53% last week and the buying was across the technology sector. There has been a lot of buying from domestic funds. In fact, there are dedicated IT NFOs being launched to capitalize on the sharply lower IT stock prices at these levels. That is surely going to keep IT stocks in the radar next week as bottom fishing continues unabated.

   

• The big news will be the progress on the HDFC twins merger. The merger was approved in the board meeting on June 30, 2023 and will be effective from July 01, 2023. However, markets are more interested in how the bank lays out its plans for the combined entity. Also, the index reshuffling should happen in the next couple of weeks as HDFC Ltd delists on July 13, 2023. That should trigger substantial passive flows.

   

• Monsoon progress will be watched this week. The reports have been that the deficit in rainfall has been largely made up, but the impact of sowing season will only be known once acreage data is out. It is expected that acreage is likely to be lower for cereals and pulses this year and that is likely to push food inflation expectations higher. In fact, that remains the one major overhang for the markets at this point of time.

   

• Needless to say, FPI flows will continue to hold the key to markets in the coming week also. FPIs infused $5.3 billion in May and topped it with $5.7 billion in June. In the coming week, the index shifts are likely to trigger a lot of positive flows from FPIs, especially the passive funds. FPIs have now infused nearly $10 billion into Indian equities in the calendar year 2023 so far, and that marks an amazing turnaround in sentiments. 

   

• One of the key data points to be watch this week will be the minutes of the FOMC meet on July 05, 2023. The CME Fedwatch is already hinting at 86% probability of a rate hike in July 2023 and the Fed minutes are likely to mirror the hawkish trend. However, the markets will now expect much greater clarity on the terminal rate levels, which now ranges between 5.75% and 6% in a worse case scenario. 

   

• There is a lot of IPO action expected in the coming week. On the mainboard, the IPO of PKH Ventures will close for subscription while the IPO of Senco Gold will open for subscription. The dates of Tata Technologies IPO are also expected to be announced during the coming week. Apart from the mainboard, there is also one SME board IPO opening for subscription in the coming week. 

   

• In the coming week, the markets are likely to react to some key data points over the weekend. The core sector growth came in at 4.3%, which is better than expected. More gratifying is the sharp growth in output in cement, steel, and fertilizers. However, auto wholesale numbers have been tepid and that could have some impact on the auto stocks that have been rallying relentlessly in last few weeks. In terms of high frequency data announcements, the focus will be on PMI manufacturing and PMI services.

   

• The market will continue to keep an eye on the twin factors of crude oil and the rupee. The crude prices were in a tight range of $74/bbl to $75/bbl last week. The coming week will still see oil caught between demand concerns and supply adjustments. That will suit Indian markets. Also, the rupee is likely to stay strong and possibly strengthen below 82/$ levels on the back of robust FPI flows in the coming week.

   

• In terms of Nifty data internals, the F&O data is hinting at Nifty ranging up to 19,500 levels on the higher side. In addition, there has been heavy put writing at 19,000 levels, which is extremely positive, especially with VIX under 11. However, after the frenetic rally of the previous week some amount of market introspection is likely to put pressure on the Nifty at higher levels in the range of 19,400 to 19,500 levels.

   

• Finally, there are some key global data points to be watched in the coming week. In terms of US data points, the focus will be on Composite PMI, factory orders, FOMC minutes, API stocks, jobs data, jobless claims, total vehicle sales. Additionally, the markets will also focus on EU PMI, retail sales, ECB Meeting. In addition, it will also keep an eye on Japan PMI, household spending and the China Caixin composite PMI. 

For the coming week, the triggers are positive. More importantly, there is a lot of bullishness that the market is entering the new week with. That should hold up markets.

How we see markets pan out in the coming week

In the previous week, the debate was all about whether the resistance of 18,800 would be breached. That is not a debate any longer. The latest week saw the Nifty breaching the resistance levels of 18,800 and 19,000 in rapid succession. It actually closed the previous week very close to 19,200 levels. Even the F&O expiry in the previous week was only smooth but short covering also boosted the markets higher.

In the coming week, there is room for some more upsides as the shorts get covered. With markets surging sharply in one week, a lot of short positions are likely to be stopped out in the coming week and that will add to the positivity. Nifty is in historical uncharted territory at around the 19,200 levels and the only constraining factor could be the markets tiring at higher levels. However, that could only happen if the VIX also moves up decisively.

For now, the options data is hinting at heavy put writing at 19,000 levels, which is a major wager on the Nifty taking support at these levels. Any brief dip in the market is likely to be met with buying support, considering the VIX is still below 11. The bullish momentum looks good to sustain for the coming week, albeit with a word of caution at 19,400 levels.