Market outlook for the week (23-Sep to 27-Sep)

23 Sep 2024 , 09:43 AM

SECTORAL STORY IN THE WEEK TO SEPTEMBER 20, 2024

The week to September 20, 2024 saw the Nifty and the Sensex again closing with smart gains, after the Fed cut rates by 50 bps. The markets rallied sharply on Friday as shorts rushed to cover on expectations that the rally in the banks and the rate sensitives may continue in the coming week. While the Fed rate cut by 50 bps was the big news, all eyes now shift to the RBI to check its reaction. For now, the data focus will also be on the CAD, especially after the trade deficit spike in August. Here is how the 20 key sectors performed in the week to September 20, 2024.

Sectoral Index	Weekly Returns	Index (13-Sep)	Index (06-Sep)
Nifty Realty	4.55%	1,101.60	1,053.65
Nifty Private Banks	3.78%	27,062.35	26,075.55
Nifty Banks	3.57%	53,793.20	51,938.05
Nifty Automobiles	2.22%	26,394.55	25,820.85
Nifty Logistics	1.99%	25,480.71	24,982.98
Nifty Non-Banks	1.97%	28,002.18	27,460.66
Nifty Consumer Durables	1.60%	43,770.15	43,081.10
Nifty Mobility	1.47%	22,744.88	22,415.18
Nifty Energy	1.47%	42,850.00	42,229.40
Nifty Infrastructure	1.30%	9,455.40	9,333.75
Nifty FMCG	1.24%	65,870.80	65,062.80
Nifty MNC	0.77%	31,711.65	31,470.65
Nifty CPSE	0.36%	7,019.75	6,994.60
Nifty Metals	0.36%	9,404.30	9,370.65
Nifty Healthcare	-0.31%	14,649.30	14,695.45
Nifty India Digital	-0.97%	9,650.80	9,745.30
Nifty PSU Banks	-1.30%	6,628.00	6,715.30
Nifty Oil & Gas	-1.44%	12,501.35	12,684.25
Nifty India Defence	-2.53%	6,671.77	6,844.81
Nifty IT	-2.74%	42,204.40	43,394.35

Data Source: NSE

Here are key takeaways from the tabulation of weekly sectoral returns above.

• Let us start with the macro picture for the week to September 20, 2024. Out of the 20 key sectors, the gainers again dominated, in the aftermath of the 50 bps rate cut by the Fed. A total of 14 sectoral indices gave positive returns for the week, with 6 sectoral indices recording negative returns. The sectors that delivered the best gains were the rate sensitives like realty, private banks, and automobile companies. IT sector ended up at the bottom on fears that a growth slowdown could hit tech spending and pricing.
• Let us start with the top gaining sectors of the week. The gainers were dominated by the rate sensitives. Among the top gainers in the week, Nifty Realty rallied 4.55%, Nifty Private Banks up 3.78%, Nifty Banks gained 3.57%, Nifty Automobiles up 2.22%, and Nifty Logistics up 1.99%. Unlike the last two weeks, the theme was not about the shift to defensives, but about the rate sensitives in the aftermath of the aggressive 50 bps rate cut by the Fed. The RBI is also expected to follow suit in October.
• What about the sectors giving negative returns. Nifty IT was at the bottom of the heap contracting by -2.74% in the week on concerns that an economic slowdown could hit tech spending and also impact pricing power of IT companies. Defensives like digital and healthcare ended up at the bottom on US slowdown concerns. Oil & gas continued to be under pressure, losing -1.44% amidst falling crude prices. The India Defence Index continue to fall, losing -2.53% this week despite overflowing order books.
• With 14 out of 20 sectors giving positive returns in the week, the arithmetic average of returns of these 14 gaining sectors stood at 1.90%, while the arithmetic average of the 6 losing sectors stood at -1.55%. However, the returns were quite dispersed across the board. Out of the 14 companies giving positive returns in the week, 3 sectors gave over 3%, four sectors gave over 2%, and 11 sectors gave over 1% returns.

During the week, Nifty VIX remained subdued around the 12.3X levels; although it did show a tendency to bounce from lower levels. With the Fed action over and the trajectory being clear now, we can expect the VIX to settle at lower levels.

WEEK THAT WAS; THE GOOD, THE BAD AND THE UGLY

For the latest week to September 20, 2024, the big news was the Fed decision to cut rates by 50 bps; although there are contrasting interpretations. FPIs have shown growing interest in Indian equities in last few weeks. FPIs infused $7 Billion in last 5 weeks and $16 Billion in the last 14 weeks since the NDA came to power. Here is a summary of the week gone by.

• The Fed statement was a clear vote for an aggressive rate cut of 50 bps. The 12 voting members voted for a 50 bps rate cut, with Michelle Bowman being the sole dissenting vote in the FOMC. But, more on that later. Not only did the Fed cut rates by 50 bps, but it also guided for an additional 50 bps rate cut by end of 2024. Clearly, the Fed sees the situation as urgent calling for a boost in the form of rate cuts, especially in the light of the rising unemployment ration at 4.2%. However, Michelle Bowman felt it was too premature to cut rates by 50 bps and 25 bps would have been good enough. According to Bowman, a 50 bps rate cut implies that the growth concerns are desperate and the Fed has won its battle over inflation. Both are not true. Although it was just one dissenting vote, this was the first dissent vote in 19 years and Bowman is a fairly influential member within the FOMC.
• FPI flows in the week to September 2020 stood at $696 Million, largely because it was a truncated week with just 3 days of FPI reporting. However, it marked the fifth consecutive week of positive FPI inflows into Indian equities. FPI flows are likely to gather steam based on how the RBI reacts to the Fed rate cut, although even an indication of rate cuts from the RBI could lead to a surge of inflows from the FPIs. For now, the FPIs would be closely tracking the current account deficit data to be put out by the RBI towards the end of this month.
• The month of September also saw the quarterly update to the long term macro projections by the Fed. Normally, the Fed puts out its projection for key macro variables like GDP growth, unemployment, PCE inflation, core PCE inflation and the interest rates for the next 4 years and the long term. This is updated each quarter. In the September quarterly update, there were some interesting changes made. On the GDP growth front, there was not much of change. However, on unemployment the 2024 end projection has been upped by 40 bps over the June estimates to 4.40%. At the same time, the PCE inflation estimate for 2024 was lowered by 30 bps to 2.30%. This combination offers the perfect setting for the Fed to cut rates aggressively. Consequently, the project rates are being lowered to 4.4% by the end of 2024 and to 3.4% by the end of 2025. In short, the FOMC itself has built in an additional 50 bps rate cut by end of 2024 and another 100 bps rate cut by the end of 2025; taking Fed rates to the range of 3.25%-3.50% by 2025.
• The India wholesale inflation (WPI) for August 2024 came in sharply lower at 1.31%; compared to 2.04% in July 2024 and 3.43% in June 2024. Effectively, the WPI inflation has fallen by 212 basis points in the last two months. In terms of the components of the WPI basket, the fall in WPI inflation was most pronounced in the food basket, primary basket, and the energy basket. However, the core WPI inflation remained rather sticky, which appears to be the trend across. The WPI inflation is a lead indicator of retail CPI inflation; but more importantly, it is a barometer of cost of funds of Indian corporates.
• In key macros, Brent crude prices closed at $74/bbl. After taking support at around $70/bbl, the oil prices saw a small bounce this week. In the last 3 weeks, oil had fallen sharply after Citi and Bank of America had downgraded the oil price target of $60/bbl on fears that the oil market was likely to remain oversupplied for much longer than expected. However, in the latest week, we saw some buying support for crude oil as sharply lower level has seen demand to spruce up the strategic oil reserves. That has offered support to crude in the short run.
• The week saw the merchandise trade deficit for August 2024 spike to $29.7 Billion. This is the highest level in the last 11 months, after we had seen a lifetime record merchandise trade deficit of $31.4 Billion in October 2023. In September 2024, the spike in the trade deficit can be attributed to a rise in imports and flat exports. However, within the import basket, the real problem was gold, which touched an all-time import levels of $10 Billion. That would concern the government as it is big and precious foreign exchange going into an unproductive asset like gold. Additionally, the services trade surplus was grossly insufficient to cover the merchandise trade deficit. As a result, the effective overall trade deficit stood at $14.66 Billion. This is an indication that the CAD could see pressure in FY25, after a rather benign year in FY24.
• Net direct tax collections up to September 17, 2024 stood 16.1% higher at ₹9.95 Trillion for FY25. While the personal income tax collections grew over 19% yoy, the corporate taxes grew over 10% on yoy basis. The third component of securities transaction tax (STT) saw collections of a record ₹26,100 Crore in less than six months of FY25. This is a sign of robust economic activity and market volumes and hints that high frequency indicators are still on the positive side.
• Finally, the Indian rupee put up a show of strength in the week appreciating to ₹83.45/$ after hovering around the ₹84/$ levels for the last 2 weeks. This surge in the rupee can be attributed to lower crude prices, surge in FPI flows and expectations that the RBI would also follow the Fed in taking a dovish stance on rates.

The action now shifts to the current account deficit in India, and the global update on US Q2-GDP and the PCE inflation for August 2024 in the coming week.

STOCK MARKET TRIGGERS FOR COMING WEEK TO SEPTEMBER 27, 2024

Here are some of the key stock markets triggers that can influence the direction of the stock markets in the coming week to September 27, 2024.

• Let us start with the index performance for the week. Among generic indices, Nifty was up +1.77%, Sensex up +1.99%, and the NSE Next-50 flat. The action in large caps was focused on banks and rate sensitive stocks. However, alpha hunting was limited in smaller stocks amidst overall uncertainty. Hence, the Mid-cap index was up +0.29% while the small cap index fell -0.89%. That trend is likely to sustain for now. Banking and rate sensitive stocks are likely to remain in focus.
• In the aftermath of the Fed rate cuts, the speeches by the Fed members will assume significance in the coming week. There will be several speakers including Raphael Bostic, Michelle Bowman, Neil Kashkari, and Fed chair Jerome Powell. The markets will specifically be interested in what Jerome Powell says and also in what Michelle Bowman says, considering that she was the sole dissenting voice in the FOMC meeting. The others have also generally veered towards the hawkish direction.
• The coming week will see 2 key data points from the US. The final estimate of Q2-2024 GDP will be out on Thursday; and is expected to close Q2 at 3%. On Friday, the US PCE inflation data for August will be announced which is expected in the range of 2.4% to 2.5%, broadly justifying the aggressive rate cuts.
• In an important domestic data point, the RBI will announce the current account deficit (CAD) for Q1FY25 in absolute numbers and also as a percentage of GDP. Amidst a spike in the merchandise trade deficit and flat growth in the services surplus, the CAD is likely to be worse than the previous year.
• Other key data flows for the week in focus will be the US bond yields and the dollar index, both of which have already factored in aggressive rate cuts by the Fed. The FPI flows into India and the Brent Crude prices will also be in focus, as they hold the key to the robustness of the rally in smaller stocks.
• In IPO action, there will be 2 mainboard IPOs opening in the coming week, while a total of 3 mainboard IPOs will list during this week. The IPOs of Manba Finance and KRN Heat will be opening during the coming week. In addition, the week will also see the IPOs of Western Carriers, Arkade Developers, and Northern Arc listing on the bourses.
• Finally, a look at global data announcements! Key US data points include PMI, HPI (housing price index), API crude stocks, new home sales, building permits, durable goods orders, Q2 GDP, and PCE Inflation. In ROW markets, key data points include HCOB Manufacturing & Services PMI, Economic Sentiment Indicator (EU); PMI Services Flash, BOJ Monetary Policy Minutes (Japan).

Finally, let us turn to how the Nifty and Sensex are likely to trade in the coming week, in terms of levels.

PARTING THOUGHTS ON NIFTY AND SENSEX NEXT WEEK

For the coming week, there are 3 things to keep an eye on.

• Last week, VIX fell sharply to 12.3 levels. In the last few weeks, VIX has been very volatile and unpredictable; but lower levels will create a buy-on-dips market.
• Nifty is in the uncharted territory of 25,000-26,500, with strong support at around the 25,300 levels. After the Fed statement, action shifts to the RBI reaction.
• Sensex has finally broken above the resistance range of 83,500-84,000 levels and settled above 84,000. The range of 78,000-79,000 remains a key support level for the index.

The action now shifts to the RBI current account deficit (CAD) and the US data on Q2 GDP and PCE inflation.