Market outlook for this week (04-September to 08-September)

4 Sep 2023 , 06:31 AM

The latest week to September 01, 2023 was a turnaround of sorts for market sentiments. After 4 consecutive weeks of negative returns on the Nifty, the last week saw the Nifty closing with gains of 0.88%. Almost the entire Nifty gains actually happened on Friday after the India GDP data for the first quarter of Q1FY24 were announced late on Thursday. The GDP growth at 7.8% in real GDP terms was much better than what the street expected. More importantly, it indicated that the series of rate hikes by the RBI totalling to 250 bps had not really dented the growth engine. Amokng the sectors, banks, oil, and FMCG remained subdued while IT and Automobiles had a very good run during the week. However, the Nifty level of 19,500 continued to be a major resistance for the Nifty. Now it has to traverse critical resistance of 19,600, 19,800 and 20,000 before it can reclaim new highs on the market. while the data has been good, confidence still remains low.

While the moves in the large cap Nifty were still cautious, it was the mid-cap and small cap indices that really surged during the week. With the large caps looking fully priced in, most retail, HNI and institutional investors were looking for bargains in the smaller stocks. Sectors like IT, defence, insurance, and chemicals have attracted a lot of buying interest in the mid-cap space. The defence space, specifically, has attracted a lot of attention in the aftermath of the launch of Chandraayan 3 in the previous week. Of course, some global issues still remain a challenge. China is yet to fully recover from the real estate crisis, Fed continues to be very hawkish, oil prices are surgi8ng and the dollar index still remains very strong. Amidst the contrasting forces, it remains to be seen, how the Nifty performs in coming weeks.

News flows from the previous week to September 01, 2023

There were 5 major news items that influenced the Nifty movement during the week just gone by.

1. The all important GDP data was announced on Thursday. At 7.8% real GDP growth, it almost looked too good to be true. Here was a $3.5 trillion economy growing at 7.8%, at a time when the global growth was still struggling. Of course, it is the India stories that are likely to benefit the most from this trend, so watch out for sectors like banking, autos, FMCG, consumer discretionary etc. Globally driven sectors like IT and Pharma may still face some resistance. However, the GDP data needs to be looked in conjunction with the 8% core sector growth for July 2023. It underlines that the core infrastructure sectors, with strong externalities, are showing substantial growth momentum.

    

2. If the India data points were being closely tracked, two key data points in the US also had its impact on the Indian markets. The US GDP second estimate for Q2-2023 was put out in this week. It was downsized by 30 bps from 2.4% to 2.1% compared to the first advance estimate. That is not great news and could be interpreted as a sign that a soft landing may not be all that simple to achieve. On the other  hand, the PCE inflation came in 30 bps higher at 3.3% for July This raises the spectre that there are still elements of inflation that have the ability to bounce back. Within the gamut of inflation, services inflation surged while goods inflation was still negative. Most of the pressure came from the energy basket, while food and core inflation trended lower. The Indian markets are yet to arrive at a consensus on how the Fed would interpret these data points.

    

3. Crude prices were the big spike factor last week as supply concerns outweighed the demand concerns in the oil market. Oil prices in the Brent market surged from $84.40/bbl to $88.10/bbl on the back of supply concerns. The Russian oil minister, Alexander Novak, confirmed that Russia and the OPEC plan to cut supplies next month to boost prices. Saudi Arabia is the world’s largest exporter of crude oil, followed by Russia. When they get together, the impact is going to be huge. Also, the concerns on the demand front and hard landing fears are gradually diminishing. Add to that; each week, the fall in US crude inventories is much sharper than expected. All that is likely to contribute to a sharp spike in crude oil prices and the price of Brent Crude may hover above $90/bbl. For India, which still relies on imported crude for 85% of its daily oil needs, that poses a sticky problem. In fact, the sharp fall in the FMCG index this week can be attributed to the spike in oil prices.

    

4. The complex interplay of FPI flows, USDINR and US data continued to be a key driver of the markets. The USDINR remained largely steady during the week at 82.60/$. However, this came amidst a surge in the dollar index (DXY) and that was only possible due to persistent RBI intervention, as it defenced the rupee by selling dollars. However, that is not a solution. To add to the woes, FPI flows have considerably slowed from an average of $5.5 billion a month between May and July to just $1.48 billion in August. This is also likely to put pressure on the Indian rupee. Meanwhile, the rising bond yields in the US is also not great news for India in terms of cost of funds and cost of capital are concerned.

    

5. The big news in the week gone by was the mega investment plans being unveiled by large Indian companies. Maruti Suzuki has committed Rs45,000 crore to double its production capacity. ONGC, BPCL and IOCL are each planning to invest more than Rs1.3 trillion in the next few years into green energy, alternate energy, capacity expansion and downstream chemicals to de-risk their fossil fuel dependence. We are not even talking about the billion dollar investments that mega groups like Tatas, Ambani and Adani are planning. If you add all these up, the mega investments planned by Indian companies could cause an upturn to the capital investment cycle and boost markets.

Going ahead, the focus will be on the net impact of all that is happening in the US and in India. Global hawkishness is not very good news, but RBI has to rein in prices quickly to ensure that inflation expectations do not soar. The immediate triggers for the market could be more company specific than economy specific.

Stock market triggers for the week to September 08, 2023

Let us now turn to some of the key stock market triggers to watch out for in the coming week, which could impact the colour and direction of the market move.

1. Nifty closed the week +0.88% up, showing weekly gains after 4 negative weeks. The late bounce in the Nifty on Friday, post the positive GDP numbers, should sustain in the coming week too. However, the real action in the coming is likely to be predicated on the smaller sized stocks with more focused business models. These small and mid-cap stocks are emerging as a critical source of alpha hunting for investors. 

    

2. The manufacturing PMI for August came in at an all-time high of over 58 while the services PMI next week is expected to stay above 60 levels. PMI is a high frequency data point and it shows that the short term momentum of the Indian economy is favourable. 

    

3. In global data cues, the US Labour data will be announced this week and that will give a picture of the underlying robustness or otherwise of US growth. In the recent weeks, the jobs report, has been hinting at slowing job creation and that may urge the Fed to call a top on rates soon. It will eventually boil down to interpretation. That is where the Fed speak by Williams and Bowman this week assumes importance.

    

4. Crude oil will be the real big story this week. Last week, the price of the benchmark Brent crude rallied from $84.40/bbl to $88.10/bbl. That is an indication that supply cuts are likely to get tougher in the coming month. The world’s two largest exporters; Saudi Arabia, and Russia, have already committed to cut output. At the same time, the demand concerns are gradually abating. For now, the bet is on oil sustaining above $90/bbl, with implications for India trade deficit and input cost inflation.

    

5. Another key trigger in the coming week will be the colour of the FPI flows. That will be the key to stock market sentiments next week. Last week, FPIs infused just $343 million, which is slightly better than $278 million in the week before that. However, it is a far cry from the $1 billion average weekly inflows during May, June, and July. FPI flows will still hold the key to short term recovery in the Indian markets.

    

6. IPO action is likely to be back in the coming week with a lot of new IPOs on the mainboard opening. Among the major mainboard IPOs opening next week are Ratnaveer Precision Engineering, EMS Ltd and Jupiter Life Line Hospitals. In addition, the IPO of Vishnu Prakash R Punglia Ltd is slated to list this week. This is just the mainboard and the SME segment continues to attract bulk of the IPO numbers.

    

7. Finally, let us look at the major data points to watch out for in the coming week across the US markets and other key global markets. The focus in the US would be on major data points like Factory orders, vehicle sales, trade balance, composite PMI, API stocks, jobless claims, and consumer credit. In the EU region, the focus on data would be on the PMI, PPI, and GDP growth. In terms of Japan data, the focus would be on composite PMI, household spends, Q2 GDP, and the current account. Finally, the focus on China data would predicate on China Trade balance, inflation, and PPI. Of course, the world is still look to China for signals of a revival in growth and demand.

Next week, the domestic macro data flows are limited, so the focus would be largely on oil and on the global data flows. 

Where is the market headed in the coming week?

During the latest week, the Nifty made several attempts to cross the 19,500 mark, but came under pressure. The Nifty closed the week at 19,435 and oil is likely to remain a major overhang on the Indian markets in the coming week. In terms of technical levels, the immediate resistance is likely to be faced at the range of 19,500 to 19,600 on the Nifty. However, the good news is that the VIX has dipped below the 12 mark and that should make it a buy-on-dips market with support. Even if one looks at the F&O options accumulation data, the call writing is heavy at 19,500 and 19,600 while the put writing is aggressive at 19,000 levels. The F&O data is broadly hinting at a similar ranged view.

There are not too many major data points in the coming week. The positive data flow from real GDP for Q1 and the core sector for July will have a positive spillover effect in the coming week. However, inflation of 7.44% will still remain the overhang for the Indian markets. A lot will depend on whether the FPIs really come back into India in droves. At this juncture, that looks like a slightly ambitious expectation.