Market outlook for the next week (October 16 to October 20)

15 Oct 2023 , 10:49 AM

IT IS OVER TO GEOPOLITICAL RISKS NOW

The latest week to October 13, 2023 was a week when the Nifty closed positive at the end of a rather volatile week. Despite 3 days of losses and just 2 days of gains, the Nifty ended the week nearly 50 bps higher. The previous week was all about data flows. India saw positive data flows on CPI inflation, IIP growth and even the trade deficit was much lower than anticipated. However, global geopolitical risks continued in the form of the worsening situation in the Middle East and West Asia as well as the risk of more US sanctions.

Geopolitical risk has the knack of coming back when it is least required. Today, the geopolitical risk arises from a number of factors. There is the strife in the Middle East and West Asia and that is likely to start impacting the crude oil prices, sooner rather than later. We saw an example of that this week as crude surged from $84/bbl to $90/bbl. Secondly, US has imposed fresh sanctions on tankers carrying Russian oil beyond the $60/bbl price cap and that is also likely to strain oil prices further Lastly, it is now a strong possibility that the US may look to extend sanctions to Iran. Geopolitics is where the action is likely to be.

NEWS FLOWS FROM THE PREVIOUS WEEK TO OCTOBER 13, 2023

It was a data heavy week. There were 8 major factors that influenced the Nifty movement during the week just gone by; and it was a mix of domestic and global factors.

1. The CPI inflation for the month of September was better than expected. At 5.02%, the consumer inflation was 181 bps lower on a yoy basis and 242 bps lower than the July 2023 levels. That is likely to give the RBI more ammunition and reasons to wait for longer at the current level of repo rates and not worry about hiking rates. 

    

2. The other big positive on the macro front was the index of industrial production (IIP) growth for August. IIP is normally reported with a lag of one month. At 10.3%, the IIP for August 2023 was the best in the last 14 months. More importantly, the surge in IIP was led by manufacturing and supported by mining and electricity. This bodes well, especially for the industrial sector with focus on the capital investment cycle revival.

    

3. Quarterly results for Q2FY24 started off with the tech sector. The lower than expected IT guidance of 1% to 2.5% constant currency (CC) sales growth guidance given by Infosys did disappoint the markets. However, the good news is that the IT companies are seeing their manpower costs stabilizing and that has also led to the stabilizing of operating profit margins in the range of 20% to 22%. IT could be the weak link in Q2FY24.

    

4. There were two important data points in the US. The US Fed announced the minutes of its September FOM meeting. While the members differed on further rate hikes, there was consensus that inflation was likely to be sticky for longer than anticipated. Hence, the rates are likely to be held at elevated levels for a longer period and rate cuts are less likely to happen in the next 6 months. This was ratified by the US consumer inflation data that came in at 3.7% for September 2023. Of course, fuel inflation was the driver, but it underlines the fact that rates are staying put for longer.

    

5. In the week before last, the dollar index (DXY) had briefly softened to the 106.20 levels but remained very close to the 107 mark. The level of 107 is important for the dollar index as that level has been crossed only three times in the last 40 years with the last two occasions in the last two years. In the current week, the dollar index bounced back to 106.67 levels after the Fed minutes and the US consumer inflation were put out during the week. This also led to the rupee weakening to 83.42/$ and remains a major pressure point for the equity markets and for FPI flows. 

    

6. If the previous week had seen a sharp fall in crude prices, the latest week again saw a bounce in crude. After falling from a high of $96/bbl, Brent Crude fell to $84/bbl in the previous week; but bounced back to $90/bbl in the current week. While a strong dollar continues to be a technical dampener for oil prices, what is boosting oil prices right now is the geopolitical strife in the Middle East and West Asia. The markets are expecting sanctions on Iran shortly and that should make the oil situation in the Straits of Hormuz tougher. This remains a major risk factor for global oil prices and for India.

    

7. If one looks at the FPI flows in the week, there is a different king of narrative building up. In the week before last, the FPIs were net sellers to the tune of $962 million. However, this week, the IPO inflows from FPIs largely offset the secondary market outflows leaving the FPIs with net equity selling of just about $215 million in the week. However, FPIs also heavily bought into debt, and if that is added, then FPIs were actually net positive for the week. Year to date the net FPI inflows  from IPOs and debt markets combined has been more than $7 billion. So, the good news is that FPIs are not really exiting India, but they are just looking to reallocate their assets; which is fair game. 

    

8. A big relief came late on Friday in the form of the trade data. The merchandise trade deficit narrowed sharply to $19.37 billion for the month of September. However, that is not the full story. The month also saw a sharp spike in the services trade surplus. The net result was that the overall deficit for the month of September 2023 was just $4.91 billion; a sharp fall of 67% from last month. This promises to keep the current account deficit (CAD) in check and as long as it stays under 1.5% of GDP, there is not much of a macro risk that the Indian economy runs.

It was a mixed week for the markets and that is evident in the ambivalent attitude shown by the Nifty in recent weeks. Risks look equally weighted on both sides, so a prolonged phase of rangebound markets looks likely. For now, 20,000 levels remain the key Nifty resistance.

STOCK MARKET TRIGGERS FOR THE COMING WEEK TO OCTOBER 20, 2023

Unlike the previous week, which was a week of heavy data flows, the coming week is likely to be more subdued in terms of data flows. The action would obviously shift to geopolitical risk and the more mundane considerations like FPI flows, crude oil prices, rupee dollar equations, quarterly results etc. There are also some big IPOs lined up and we could see dates being announced this week. It may not be a data heavy week, but it surely promises to be an action-packed week for the stock markets. Here are the major market triggers for the coming week and how they will impact the market narrative.

• For the week to October 13, 2023, the Nifty closed with gains of +0.50%, Nifty Next-50 closed with gains of +0.76%, the Nifty Mid-cap index saw gains of +0.55% and the small cap index also ended +0.44% higher. For the Nifty, it was a week of mixed sentiments, but the fall in the Nifty in the last two days of the week were not as sharp as the spike in the previous 2 days. That enabled the Nifty to end strong, although it is up against key resistance levels now. In the mid-cap and small space, alpha hunting will continue. 

   

• It is the results season and this week the markets will largely move beyond the technology narrative. Some of the key large cap Q2FY24 results to be announced this week include Bajaj Finance, ICICI Pru Life, Bajaj Auto, LTI Mindtree, ITC, Ultratech, Wipro, ICICI Bank & JSW Steel. In addition, there are also some important mid-cap results announcement for Q2FY24 and these include popular names like Ceat, Jio Financial, VST Industries, ICICI Lombard, CSB Bank, J&K Bank, L&T Finance, Yes Bank.

   

• The IPO story is gathering steam and this week will see action in the mainboard and the SME IPO segment. IRM Energy IPO opens on 18-Oct, but more importantly, the IPO dates for Protean eGov Technologies Ltd (NSDL e-Governance) and Tata Technologies (subsidiary of Tata Motors) are expected to announce their IPO dates this week. Tata Motors also did a pre-IPO placement of Tata Technologies stock with a PE Fund. Robust IPO action is expected in the SME segment with the IPOs of Arvind, WomanCart, Rajgor Castor and On Door Concepts opening this week.

   

• The wholesale inflation (WPI) on producer price inflation will be out the coming Monday. After a gap of 5 months, the WPI inflation is expected to get back into positive territory this month. WPI is normally a lead indicator for CPI inflation, but it is also a signal that corporate inflation may be building up. Another key domestic data this week will be the announcement of the RBI MPC minutes of the October monetary policy. While RBI had kept status quo on rates, inflation, and GDP; it is the language of minutes that will hold the key.

   

• US bond yields and dollar index will continue to be tracked this week. The good news is that the US bond yields tapered to 4.61% from 4.81%, but dollar index increased this week to 106.67. Higher dollar index is a sign of imported inflation into India. Hence, this would worry the markets on the oil price front. The Hamas conflict has already resulted in the price of crude spiking from $84/bbl to $90/bbl in the week. One factor that the markets would be watching closely next week is the building geopolitical risks.

   

• In the realm of US monetary policy, it is not just about the Fed statement and the minutes. Since Fed takes its communication very seriously, what the Fed members speak also matters. This week, the US Fed Chair, Jerome Powell, is likely to speak and the markets will track the wordings of the Fed Chair for hints on the trajectory of Fed policy.

   

• Finally, there are the global data points to quickly track. In the US, the focus would be on Industrial output, jobless claims, Powell speak, oil stocks, and Q3 results of Goldman, Tesla, P&G, Morgan Stanley. Among other markets, the focus in EU will be on EU Trade balance and on UK unemployment and CPI inflation. In addition, Asian cues like the Japan Trade Balance, Japan inflation and China’s Q3 GDP and Industrial output will also be closely tracked.

In a nutshell, it promises to be an action-packed week, but the overall action would depend on an amalgam of domestic and global trends.

IS THE NIFTY LIKELY TO BE STUCK IN A RANGE?

For now, that looks like the most likely scenario. Nifty options data shows support at 19,500 levels and resistance at 20,000 and the technical levels also approximately correspond to these levels. However, the good news is that, while downside risks to the Nifty have opened up due to the Hamas conflict, the low VIX of 10.62 should offer adequate support and buying and lower levels . For now, the Nifty is likely to remain in a range.