Market outlook for the next week (October 23 to October 27)

23 Oct 2023 , 06:55 AM

MARKET PRESSURE ON MULTIPLE FRONTS

The latest week to October 20, 023 saw pressure on the market on multiple fronts. The US bond yields spiked to near 5%, while the geopolitical risk in the Middle East and West Asia continues to be an overhang for oil prices. In addition, the FPI flows continued to be negative, although the debt flows were positive on the back of Russian exporters putting their vostro account surpluses to use in the domestic government securities. But the market continues to be in a very weird state of flux with contrarian forces at play.

Let us leave aside the geopolitical risks for the time being, as there are largely man-made. This is a crisis that could have been avoided. However, the real dichotomy that we are talking about is at a different level and involve the two most powerful global economies of  the US and China. On the one hand, the US central bank has been hinting that hawkishness was not done due to signals of robust GDP growth and tight labour market conditions. This raised fears of robust growth boost inflation and input costs. On the other hand, China is under pressure due to the real estate crisis and it is keeping its costs low. That is, perhaps, preventing runaway inflation from returning. The real truth lies somewhere in between.

NEWS FLOWS FROM THE PREVIOUS WEEK TO OCTOBER 20, 2023

It was a data heavy week. There were 7 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 WPI inflation for the month of September was still in the negative, although it was expected to bounce back into positive. However, this is the highest level of WPI inflation in the last 6 months. This also raises the big question of whether the cost of inputs in India will get impacted since WPI inflation is all about producer inflation. That is not too clear at this point of time, but it is a case where the CPI inflation has been tapering and the WPI inflation has been hardening; albeit from different base levels.

    

2. The other big event in the week was the publication of the RBI MPC minutes. The members of the Monetary Policy Committed (MPC) were unanimous about holding repo rates at 6.5%, but not in consensus on the monetary stance of the policy. However, there is expectation that inflation could move higher from these level, although it is not clear if it would translate into rate hikes by the RBI. But, the RBI is clearly preparing for a scenario when food and fuel prices result in a spike in consumer inflation in India.

    

3. Quarterly results for Q2FY24 started off with the tech sector and this week the banks and the FMCG companies also disappointed. Wipro was the latest IT stock to disappoint with negative sales growth and guidance of negative top line growth in revenues in constant currency terms for FY24. In addition, the IT companies are also facing problems of rising costs despite a sharp reduction in the manpower numbers. The top 4 IT companies have cut nearly 16,000 staff in this quarter. In addition, the banks showed signs of weakening NII growth and peaking of NIMs. HDFC bank and ICIC Bank were below expectations on margins and also on top line and bottom line growth. The third sector disappoint this week was FMCG where ITC and Hindustan Unilever reported slowing sales growth and cost pressure on margins. These stocks becoming increasingly vulnerable considering their steep valuations in the market.

    

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. Let us now turn to the all-important combination of US bond yields on the 10-year benchmark and the Dollar Index (DXY). Just a couple of weeks back, the dollar index (DXY) had crossed the 107 mark. The level of 107 is important for the dollar index as that level has been crossed decisively only three times in the last 40 years. Incidentally, the last two occasions occurred in the last two years. In the current week, the dollar index tapered to 106.15 levels after repeated indications came that the Fed would pause for longer. The rupee would have weakened much more had it not been for RBI intervention. However, the bigger impact was on the 10-year bond yields in the US, which spiked to 4.99%, before closing the week at 4.91%. This is already the highest level in US bond yields in 23 years and it is already putting  a lot of pressure on the Indian bond yields and also on the Indian rupee.

    

6. Geopolitical risk and crude oil prices are almost mentioned in the same breath and rightly so. Just about 2 weeks back, crude had touched a high of $96/bbl but later tapered to $84/bbl on long unwinding. However, the last 2 weeks saw Brent Crude again spiking to above $92/bbl on worsening geopolitical tensions. While dollar strength 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 Israel Hamas war could result in sanctions on Iran; and that should make the oil situation in the Straits of Hormuz very fluid. That kept crude prices under pressure.

    

7. Finally, let us look at FPI flows in the latest week. It continued to remain in the negative for the sixth week in a row. FPIs sold $284 million in the latest week in equities and have till now sold $1.35 billion of equities in the first 3 weeks of October. However, what is saving the day for FPI flows is the predominance of FPI flows into debt, which is triggered by surpluses held in Indian vostro accounts of Russian oil exporters to India. Currently, these funds can only be invested in government securities and that is triggering flows into Indian debt paper. Year to date the net FPI inflows  from IPOs and debt markets combined has been more than $7 billion. FPIs are not really exiting India, but they are just looking to reallocate their assets; which is part of any story.

It was a mixed week for the markets and that is evident in the ambivalent attitude shown by the Nifty in recent weeks. Risks are clearly in favour of the bears and not conducive to the bulls at this point of time. For now, 20,000 is the key longer range Nifty resistance.

STOCK MARKET TRIGGERS FOR THE COMING WEEK TO OCTOBER 27, 2023

The next week is likely to be interesting in that apart from global macros and geopolitical risk, there are also critical data flows coming into the markets. Here is what the stock markets are likely to focus on in the coming week.

• Nifty closed the week -1.06% lower, while the Nifty Next-50 closed -1.64% lower. It is clear that the geopolitical risk was the key pressure point on Nifty and that is likely to continue in the coming week also. There was not much respite on the mid-caps also, since the mid-cap index also corrected by -1.55%. in the week. However, the small cap index was up +0.26%; indicating that alpha hunting continued to be the big story last week and that is likely to continue in the coming week also.

   

• There are major large cap Q2FY24 results expected this week, including big names like Reliance Industries, Bajaj Finserv, Maruti, Axis Bank, Asian Paints, Tech Mahindra, Reddy Labs and NTPC. Reliance, as always, will be the bellwether for industrials and also a proxy for Indian economy. In addition, some key mid=cap quarterly results for Q2FY24 are also likely to be declared this week. The mid-cap names include Torrent Pharma, Mahindra Logistics, ACC, Rallis India, Jubilant Foodworks Sonata, Colgate, Canara Bank and more. 

   

• There are some interesting IPOs coming up this week. The mainboard IPOs of Bluejet Healthcare and Tata Technologies are likely to open this week. In addition, there are also 4 SME IPOs slated to open in the coming week. to open this week; apart from 4 SME IPOs opening this week. Being the results season, this week will also see several stocks go ex-dividend. Some of the names in the ex-dividend list for the week include Infosys, Astral, ICICI Securities, ICICI Lombard General Insurance, LTTS, LTI Mindtree, Jindal Stainless and many more.

   

• Crude prices will be in focus amidst the rising geopolitical concerns since the causality is almost direct and irrefutable. This week, Brent Crude crossed $92/bbl and any disruptions in the Straits of Hormuz could take oil beyond $100/bbl. That may not be a very salutary scenario for the Indian economy, which depends on imports for 85% of the oil requirements. However, the heightened uncertainty also saw FPIs moving to the sidelines and they are likely to stay out till geopolitical risks are identified. That uncertainty is likely to continue this week, although debt flows from Russian vostro accounts are likely to remain robust.

   

• A major trigger for the coming week will be the dual macro parameters of US bond yields and the US dollar index (DXY). Last week, the US 10 year bond yields touched a 23 year high of 4.99% and this week it is likely to make a dash for the 5% mark. It needs to be seen what impact it would have on the bond holdings of banks and other institutions. But for now, the impact of the high bond yields and rising dollar index are likely to put pressure on the USDINR equation and also the level of imported inflation into India. 

   

• There are two major data points in the US to be announced this week. There is the first advance estimate of Q3 GDP which is estimated to spike from 2.1% for Q2 to 4.1% for Q3. This is likely to put pressure on the Fed to contain inflation rapidly as high GDP growth is not consistent with low inflation. Also, the PCE inflation for September is expected to taper to 3.4%, led by lower core PCE inflation. However, fuel will be the pressure point. In addition, the markets will also focus this week on the speeches delivered by Fed chair, Jerome Powell, and governor Christopher Waller in this week. The tone of the Fed for November will come out of this data.

   

• Finally, let us look at the key data points from the US and the rest of the world that will have an impact on Indian markets. This includes Fed Board meet, Composite PMI, API crude stocks, New home sales, Building permits, GDP, PCE, and Powell speak. In other regions, the focus will be on consumer confidence, HCOB, Composite PMI, and ECB rates in the EU region; as well as Jibun Manufacturing and PMI flash in Japan.

This is likely to be a week focused on data and geopolitical risk. In the absence of clear positive stimulus, the Nifty and the Sensex are likely to remain under pressure.

WILL NIFTY AND SENSEX GET STUCK IN A RANGE?

For now, A rangebound market looks the most likely scenario for the Nifty and the Sensex. The Nifty is likely to respect the range of 19,500 on the downside and 19,800 on the upside. The technical levels and the F&O accumulation data nearly match at these levels. In the case of the Sensex, it is likely to be range bound between 65,000 and 66,000 levels for the coming week. The good news is that the VIX at 10.81 levels for the Nifty, largely limits the downside risks.