Market outlook for the next week (July 31 to August 4)

31 Jul 2023 , 09:52 AM

After several weeks of unrelenting rally, the Nifty closed the week in the red, although the fall was just about 50 bps. A mix of global and domestic factors played on the markets. Above all, it was the acrophobia of markets that really snapped the rally. In the previous week, the Nifty had gotten tantalizing close to the 20,000 mark. However, in the current week ended July 28, 2023, the Nifty remained more subdued in the range of 19,600 to 19,800. Quarterly numbers have almost entered the halfway mark and, barring few exceptions, the results have been better than expectations. 

FPI flows were relatively tepid in the week, but that can be largely attributed to global investors reworking their allocation calculations post the 25 bps rate hike by the US Federal Reserve. The big positive for the markets is that most of the macros appear to be favouring the markets. The only concern, perhaps, could be crude prices, which has rallied to $85/bbl. However, with the comfort of a large Russian oil basket, the impact on India may be limited. Let us first turn to the major news flows.

News flows from the previous week to July 28, 2023

There were 6 major news items that influenced the Nifty movement during the week just gone by.

1. The big event in the week was the Fed announcing its July policy on Wednesday. As expected by the market, the Fed hiked rates by 25 bps to the level of 5.25%-5.50%. Markets were watching the language of the Fed, but it preferred to remain non-committal, merely harping on more of a data driven approach.

    

2. The second big news during the week was the crude oil prices. In the previous week, oil had crossed $80/bbl and this week oil got to $85/bbl. For India, any price above $80/bbl has a direct impact on the trade deficit. However, this time around, the impact should be more subdued since Russian oil imports are hardly market linked.

    

3. The US economy second quarter GDP was also announced in the week. The first advance estimate came in at 2.4%. That is not only above the Q1 GDP growth but also well above the street estimates for Q2. Also, there will be two more estimates for Q2. For Indian exports and tech spending, this is a fairly positive announcement coming in.

    

4. FPI flows for the week were relatively tepid, although the FPIs were still net buyers to the tune of $191 million. However, this was explained by IPO flows while FPIs remained sellers in the secondary market. That could be more of profit booking after a sharp rally. Another trigger could be the sharp fall in the Indian rupee during the week.

    

5. Another major global data point that was announced during the week was the US PCE inflation, which came in sharply lower at 3%, with core PCE inflation at 4%. This underlines the belief that the Fed would be inclined to hold rates for longer rather than hike rates from here. That is broadly positive for all emerging markets, including India.

    

6. Big buybacks are back in the Indian market and this time it is not just the IT companies. L&T just approved a Rs10,000 crore buyback while Piramal Enterprises is expected to announce its buyback soon. Large companies announcing a buyback at elevated levels of the market surely instils a lot of confidence in the investors at large.

Overall news flows have been positive for markets, but there are a handful of concerns too. Firstly, the rainfall deficiency has combined with deluges in several places. This kind of erratic monsoons can do a lot of damage to crops and spike food inflation. That was already visible in the June CPI numbers. Secondly, the Nifty is in uncharted territory and Nifty at historic highs supported by very low VIX of around 10.12 can be a very volatile combination. It is hard to predict, when the enthusiasm can transform into a sell-off in such markets. Finally, the dollar index (DXY) will be a point of concern as it has been strengthening. That is not great news for the USDINR. Dollar strength is not only coming from the rate hike, but also from better than expected GDP numbers in the US. The rupee impact remains a fairly uncertain factor for markets now.

Stock market triggers for the coming week to August 04, 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.

• The Nifty closed the week -0.50% down, while the Mid-cap index was up +1.52% and small cap index was higher +0.61%. The Nifty is obviously facing some stiff resistance at the 20,000 levels and it would take some effort to get the better of. However, the VIX still low at the 10.14 levels, it would still be a buy on dips market next week. Action is likely to focus more on the mid-cap space where alpha hunting is likely. This alpha hunting is more likely outside the frontline index stocks. 

   

• This week would see the final set of major results being announced. Some of the major large cap Q1FY24 results that are likely to be announced this week include companies like Maruti, GAIL, State Bank of India (SBI), Power Grid, Titan, Bharti Airtel, Adani Enterprises, Eicher Motors, Sun Pharma and Mahindra & Mahindra.  Among the major mid-sized companies that are likely to announce their Q1FY24 results this week include names like Lupin, HPCL, Bank of Baroda, Interglobe Aviation, Zomato, Bosch, Escorts Kubota, PVR Inox, Mankind Pharma and Dabur.

   

• FPIs infused just $191 million in the week. However, the total flows for July stand at $5.53 billion, with one trading day to go. FPIs have infused close to $17 billion in the last 3 months, which is half the funds taken out by FPIs between October 2021 and June 2022. The key data point for dovish interpretation of Fed action will be the PCE inflation coming lower than expected at just 3% for June 2023.

   

• In key macro data points for the week, Core Sector and Manufacturing and Services PMI are expected to be announced this week. Both these are high frequency indicators and they have been hinting at a gradual revival in growth. Markets will look for an affirmation. The other big macro update would be the fiscal deficit and the markets would want to reaffirm that the Indian economy is on target for 5.8% FY24 fiscal deficit.

   

• The all-important monthly auto sales numbers for major auto companies will also be announced this week. These number pertain to the July dispatches to dealers and not to retail demand. The growth is expected to range between 2% and 10% with most of the traction coming from 2-wheelers. While PV and CV numbers are likely to be flat to positive, the real traction is expected from tractors and two-wheelers. Both are emerging as veritable plays on revival in rural demand.

   

• Brent crude climbed rapidly to nearly $85/bbl during the week and that is going to be a key macro global factor to watch out for. Any rate above $80/bbl puts pressure on the rupee and also on the stock markets and with OPEC cuts intact and US inventories dwindling sharply, the pressure on oil prices is likely to continue next week. 

   

• There is going to be some real IPO action in the coming week. There will be two mainboard IPOs and also a slew of SME IPOs to open in the coming week. Among the two mainboard IPOs opening this week are SBFC Finance Ltd and Concord Biotech Ltd. The latter has a major 24% equity stake held by RARE Enterprises, the investment firm belonging to the Rakesh Jhunjhunwala family. 

   

• In the coming week, the Nifty is likely to see support at 19,450-19,500 and resistance in the range of 19,800 to the 20,000 levels. The chances of breaching 20,000 look to be low in this week, but low VIX of around 10.14 does indicate buy on dips at lower levels. This week lacked sector rotation and that could be the key factor to watch out for next week.

   

• Finally, here are some major data points to keep an eye on. For the US markets, the key macros to watch out for would be the composite PMI, new orders, JOLTS, construction spending, API stocks, vehicle sales, jobless claims, and the non-farm payrolls. On the triggers from the rest of the world, the key data points would be GDP, PMI, and retail sales from the EU region. The data points in Japan would be retail sales and policy minutes while for UK it would be housing, car sales and MPC minutes. The sole data point to watch in China would be the composite PMI.

In terms of domestic macro data flows next week, there is not much apart from the core sector and the PMI data. At a global level, it would largely be a reaction to the Fed action, US GDP, ECB rate  hikes and US PCE inflation. 

How we see markets shaping up in the next week

In the previous 4 weeks, the Nifty witnessed a frenetic rally from 18,500 levels to the 19,980 levels with virtually little resistance along the way. It traversed over 1,400 points helped along the way by constant sector rotation and strong FPI flows. From here, the rally will need a very good story to go beyond the 20,000 levels and sustain above it. Both, the Nifty and Sensex are in uncharted territory, so the leadership will come from news flows and FPI inflows. However, VIX at 11. 5 is an indicator that downside risks to the Nifty is limited.

Over the last 5-6 weeks, the Nifty has broker through multiple resistances levels like 18,600, 19,000, 19,500 and 19,800. The good news is that, global macros notwithstanding, the Q1FY24 results have been better than expected in most sectors. Being in technically uncharted territory, the only psychological level we can rely on is 20,000 for the Nifty. It may, probably, need some more time wise consolidation, so markets may be preparing for a more rangebound action next week.