Market outlook for this week (18- Mar to 22-Mar)

18 Mar 2024 , 07:50 AM

NIFTY, SENSEX FALL SHARPLY DESPITE STRONG FPI FLOWS
In the week ended March 15, 2024, Nifty and Sensex fell by 2%, but the real action was much deeper down in the market with clear segregations in the market. Here are some broad trends that we observed in the market action during the week ended March 15, 2024.

1) The FPI flows were extremely robust at $3.48 Billion during the week. Over the last 4 weeks, the FPIs have infused nearly $5.55 Billion into Indian equities. While debt flows continued to be robust, the week also marked the shift of FPI flows from the debt side to the equity side. However, the markets corrected sharply despite the FPI flow factor.

2) It was a classic case of global cues impacting Indian markets during the week. The one factor that spooked the markets at a macro level was the sharp spike in US bond yields to 4.308% levels after the US inflation came in higher than expected and the US Fed also looked more likely to cut rates only in the second half of the calendar year 2024.

3) In terms of sectoral moves, most sectors came under pressure. The maximum pressure was seen in oil & gas stocks, followed by autos and banks. Most of that had to do with unwinding of stocks at higher levels and after a very sharp rally. However, even in the midst of the tumult in the markets, the IT sector stocks surged more than 1%.

4) The fall in the markets was focused on the smaller stocks with the mid-cap index falling 4.66% and the small caps falling by more than 5.5% during the week. In comparison, the fall in the Nifty and the Sensex was relatively more subdued at just about 2% this week.

5) The week also saw a lot of unwinding of stocks to farm tax losses to reduce the capital gains liability for the current fiscal. With the end of fiscal FY24 coming up, HNIs need to rather book losses on positions to avoid paying too much of capital gains tax.

In short, the market fall was a lot more nuanced that a simple linear crash in the index.

WEEK THAT WAS; THE GOOD, THE BAD AND THE UGLY
For the latest week to March 15, 2024, the Nifty and the Sensex were 2% down. These 8 key data points influenced FPI flows in the week to March 15, 2024.

1) The big trigger for the fall in the markets was the sharp spike in US bond yields. During the week, the US bond yields closed at 4.308% with the spike largely led by fears of delayed rate cuts and a sell-off in the bond markets in the US. The higher bond markets are negative for Indian markets as it normally triggers higher bond yields in India and also threatens to make cost of funds higher.

2) During the week, global rating agency, Moody’s Investor Services, upgraded the GDP growth estimate in India for FY24 to 8%. This is sharply higher than the MOSPI projection of 7.6% growth and the RBI growth projection of just about 7%. The upgrade did trigger a surge in FPI flows, but the selling was so intense that it really did not matter. However, the Moody’s upgrade is likely to trigger a slew of other upgrades by brokers.

3) For India, it was the Goldilocks effect all over again. Inflation has stayed lower than expected and growth has remained higher than expected. For February 2024, consumer inflation was virtually flat at 5.09%. While inflation continues to trend lower, the food inflation has trended higher. This trend was seen in the case of WPI inflation also where it was food items putting pressure. On the growth side, IIP growth for January came in lower at 3.8% due to a higher base. However, the December 2023 IIP was upgraded by nearly 41 basis points. That opens up the possibility that even the current month IIP could be upped. The strong manufacturing growth is evidence of strong IIP growth too.

4) FPI flows in the last week were robust at $3.48 Billion, taking the total FPI flows to $5.55 Billion in the last 4 weeks. It was not just debt flows in the week, but there was also a sharp shift towards FPI flows. With, the likes of Moody’s upgrading the India growth target to 8%, the gates are open for more FPI flows. Of course, the FPI flows into debt are likely to continue amidst the inclusion of Indian bonds in global bond indices.

5) US consumer inflation for February 2024 came in 10 bps higher at 3.20%. The pressure came entirely from the crude oil prices as the Red Sea crisis had a strong impact on US gasoline prices. This is likely to make the Fed wary about cutting rates in the first half of 2024 and now rate cuts in the US look more likely in the second half of the month. Most economists had projected flat inflation, so this is a negative surprise. The next few months inflation numbers could be critical in helping the Fed work out a policy response.

6) India trade data (exports and imports of goods and services) for February 2024 continued to be very comfortable. The merchandise trade deficit for February was marginally higher at $18.25 Billion, but now the deficit has stayed under $20 Billion for 3 months in a row. The Red Sea crisis has hit exports, but it has hit imports too and that means the net impact is not too bad. The big news is the growing services surplus. As per DGFT estimates, the overall deficit for February 2024 was $1.95 Billion as the services surplus substantially wiped out the merchandise trade deficit. Also, the cumulative overall deficit at the end of 11 months stands at $72 Billion, which promises lower than 1.5% CAD to GDP ratio.

7) Crude oil was the other big poser in the week with crude prices spiking to $85.50/bbl with the IEA and the OPEC virtually confirming that the oil market would remain undersupplied. It only means that oil prices could now get closer to $90/bbl, a level at which Indian policy makers do tend to get slightly jittery. For India, oil poses a unique problem, as India relies on imported crude for nearly 80% of its daily crude oil requirements. That is a risk to oil imports costs and also for imported inflation.

8) Last, but not the least, SEBI approved the launch of T+0 settlements on a test basis for a small set of stocks. It will be voluntary to begin with. The idea is to gradually move towards instant settlement by March 2025 by quickly learning along the way. This move is likely to make markets more efficient, churn funds faster and reduce the risk of investors in the market place.

In the last one week, the frontline indices cracked more than 2%, despite FPIs being aggressive buyers in Indian equities. While rising US bond yields was the macro risk, the fall was more pronounced in smaller stocks as that is where the SEBI has issued warnings to fund houses and also clamped down on the small cap rally by imposing steep penalties like additional special margins (ASM) and 100% upfront margins. The target was the froth!

STOCK MARKET TRIGGERS FOR COMING WEEK TO MARCH 15, 2024
Here are some of the key triggers that will have a bearing on stock markets for the coming trading week from March 18, 2024 to March 225, 2024.

• It was a week when markets cracked across the board. Nifty fell by -2.09%, Sensex by – 1.99%, and the Nifty Next 50 closes by -3.75%. With bond yields in the US headed higher, large cap stock may remain quiet for now. The same is the story with small and mid-caps also. Here it is more about froth, but that is likely to continue for now. For the week, mid cap index closed -4.66% lower and small cap ended -5.49% lower.

• The big news in the coming week will be the Fed meeting and the Fed stance on rate cuts. Markets are not expecting any rate cut in March and that is something factored into the pricing on CME Fedwatch. However, the Fed has also ceased on its rate hikes and the coming policy statement may see the first time table for rate cuts. In addition, the US Fed meeting will also release the quarterly update of Fed long term projections for growth, jobs, and inflation over the next 5 years. That is a key long term document.

• In terms of domestic data, the banking loan and deposit growth data will be put out in the coming week. Most banks have seen deposit growth falling way short of loan growth. This is likely to trigger deposit rate hikes by banks who are aggressive and even desperate to improve their deposit growth, since such deposits will have to be attracted by offering higher rates of interest, something that can impact the profit margins.

• FPIs infused $3.48 Billion in the week and $5.55 Billion in the last 4 weeks. This is a positive signal as it shows that the FPI interest is coming back to Indian equities, even as bond inflows stay robust. However, the only concern on this front could be that the coming week is likely to be tepid for IPOs. A number of IPOs in the previous week saw tepid listings as well as tepid listings.

• Mutual fund stress tests will continue to drive mid and small caps lower as it becomes evident that most of the funds may be sitting on mountains of illiquid stocks, where exit may become a huge challenge. Most mutual funds that participated in this stress test, reported that portfolio unwinding can take much longer that originally expected. That is likely to keep these smaller stocks under pressure, after the recent frenetic rally.

• For the Indian markets, oil prices will remain a major trigger. Last week, the price of crude oil crossed $85/bbl and the street is already pegging oil at closer to $90/bbl. This is more so after the OPEC meeting last week and the report by the International Energy Agency (IEA), hinted that oil market will remain undersupplied, demand will stay robust and supplies will be curtailed. That could push oil closer to $95-100/bbl.

• Finally, we turn to the key global data points for the week from the US and ROW. Key US data points included Fed rates, housing starts, API stocks, jobless claims, CAD, existing home sales, PMI composite, MBA mortgages. For EU, the focus will be on inflation, trade, HCOB, and PMI; while for the UK it will focus on the Bank of England meeting and the inflation level. In key Asian markets, the Japan focus will be on BOJ rates, trade account, PMI, and inflation; while China puts out IIP, jobs, and retail sales this week.

It is likely to be an action packed week, but the US Fed meet and oil will drive the direction.

FURTHER DOWNSIDES LIKELY FOR NIFTY AND SENSEX
For the week, the Nifty and the Sensex closed weak with losses of 2% each, despite the robust FPI flows. It has opened the chances that the Nifty could fall further below 21,850 after the 20-DEMA (daily exponential moving average) as well as the rising trend line were breached on the downside. The good news is that the VIX is just at 13.7 levels, but that may not really matter when the story is about position unwinding.

In terms of support levels, the Nifty has support at 21,850 while the Sensex has support at around the 72,000 levels. For this week, we will not focus too much on the upside as the market is likely to remain a sell-on-rises market. Last week we had underlined that upsides would be limited for the time being till there is decisive evidence that a big shift is likely to happen. The good news is that the recent correction in the Nifty and Sensex has made markets more valuable and less vulnerable.