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

18 Sep 2023 , 08:23 AM

The latest week to September 15, 2023 was again a week in which the bullish undertone of the stock market got underlined. After rallying by 1.98% in the previous week, the Nifty once again rallied by 1.88% in the current week. As of the close of the week, the Nifty closed at 20,192 levels while the Sensex closed the week at 67,839 levels. The gains in the week came largely from banks and IT companies, but the real bullish undertone of the markets was reinforced by the macros. On the last day of August, the GDP growth at 7.8% for Q1FY24 had set the rally in motion. Since the start of September, the Nifty has rallied more than 900 points and it marks one of the sharpest rallies in the Nifty in such a short span of time. Also, the rally came after the Nifty had been struggling for the past few weeks with the levels of 19,400, 19,600 and 19,800 consistently proving to be the resistance levels for Nifty.

The current week began with more positive macros and that helped the Nifty to rally further. The consumer inflation, although well above 6%, was about 61 bps lower than the July reading. More importantly food inflation was tapering. The second big boost came from the IIP numbers. At 5.7%, the IIP showed a strong bounce in the month of July 2023 and the biggest boost came from the manufacturing sector, which has a weight of 77.63% in the IIP basket. Of course, there were concerns too. The rupee continued to stay weaker than 83/$ while Brent Crude rallied to above $94/bbl. More importantly, the US consumer inflation came in 50 bps higher at 3.7%, indicating that the hawkish undertones of the market are not going away in a hurry. RBI is still in a dilemma on whether to stay put o rates or to hike rates, but that may depend on what the Fed does on September 19, 2023.

News flows from the previous week to September 15, 2023

There were 7 major triggers that influenced the Nifty movement during the week just gone by.

1. Consumer inflation or CPI inflation was the first big trigger for Indian markets. On a MOM basis, the inflation for August 2023 was lower at 6.83% compared to 7.44% in July 2023. This is still above the RBI comfort zone of 6% at the upper end. However, the inflation has given comfort on two fronts. Firstly, it syncs with the RBI argument that the current spike in inflation was driven by food prices and should taper automatically. Secondly, it gives the RBI just that extra bit of leverage to wait out the October policy with a status quo and take a final call in December. We have to wait and watch.

    

2. If India inflation was a tad better than expected, then the US consumer inflation spiked by 50 bps to 3.70%. Now, it must be noted that food inflation and core inflation are sharply lower in August, but the spike in inflation entirely came from energy inflation. That is triggered by the prices of Brent Crude spiking to above $94/bbl. It remains to be seen how this inflation reading influences the Fed stance on rates in the September 19, 2023 meeting. It is still likely that the Fed may hold status quo in September but give a strong inkling of a rate hike in November. In short, hawkishness is here to stay.

    

3. The third positive development was with respect to the index of industrial production (IIP) spiking to 5.7% for July 2023 (IIP is announced with a lag of 1 month). The most gratifying outcome was the sharp bounce in manufacturing IIP, which has the highest weightage in the IIP basket. Also, the growth drivers are still coming from domestic plays while the growth pressure is coming from the global plays. However, this can be a good lead indicator that GDP growth would continue to stay robust in Q2 also.

    

4. FPI flows were negative for the second week in succession. Of course, the total FPI selling at Rs566 crore was relatively tepid, but again the FPIs were sellers in 3 out of the 5 trading sessions this week. For now, the impact on the markets is limited as domestic funds, LIC and the retail investors flows are still robust. However, at higher levels of the market the negative flows from FPIs can put pressure. Clearly, the FPIs are biding their time with the uncertainty over the Fed action on rates. Also, FPIs have been slightly ambivalent with the ECB hinting at a possible e3nd to the rate hike cycle in Europe.

    

5. Crude oil continues to remain on the boil at over $94/bbl. Now, crude is just about 5 dollars shy of the $100 mark and the pressure is already visible in the trade data. The merchandise trade deficit for August widened by more than 16% on a MOM basis as the merchandise trade deficit crossed the $24 billion mark. This has been partially an outcome of the higher crude prices and partly an outcome of the weaker rupee, which his automatically making the imports costlier. Also, the latest report by OPEC hints at Brent crossing $100/bbl as the demand for oil continues to be robust among the major oil consuming countries in the world. That will be an overhang for Indian markets.

    

6. The other factor that would be an overhang for the Indian markets is the weak rupee. Now, rupee is consistently above 83/$ and that is happening despite the RBI regularly intervening in the dollar market by selling spot dollars. Of course, the RBI has its own constraints since it cannot allow the forex reserves to slip too much. However, the real pressure on the rupee is coming from external factors. The US 10-year yields spiked to 4.33% and that has led to the US Dollar Index (DXY) hardening to well above the 105 levels. This is likely to impact markets as it puts pressure on the trade balance as well as on the FPI flows into India; who generally prefer a stable rupee.

    

7. Amidst all this macro uncertainty, the good news was that the companies with the right credentials and the right narrative still had its share of investors and lenders. After Qatar Investment Authority infused $1 billion into Reliance Retail for a 0.99% stake, KKR added another 0.25% in Reliance Retail for Rs2,070 crore at similar valuations. In another story, banks are competing to fund the $3.5 billion refinancing for the Adani group for its loan taken to buy out Ambuja Cements. Where there is credible story, the cheque books are still coming out, and that is the good news for the week.

Going ahead, the focus will be on the net impact of all that is happening in the US and in India. The biggest even in the coming week will be the US Fed meet, which concludes on September 19, 2023. In a sense, the outcome and the language could set the tone for the markets globally, India included.

Stock market triggers for the coming week to September 22, 2023

The coming week from September 18, 2023 to September 23, 2023 is likely to be largely influenced by the FOMC outcome. However, in the Indian context, the focus may continue to remain on the large caps, as smaller stocks face profit booking. Here are the triggers.

• Nifty closed the previous week with gains of 1.88% after gaining 1.98% in the week before that. Nifty has rallied more than 900 points in September even amidst selling. However, other generic indices came under pressure with the Nifty Next-50 index down -0.13%, the Nifty Mid-cap index ending -0.21% lower and the Nifty small cap closing with losses of -0.14% lower. The losses on smaller indices were marginal, but that trend is likely to continue in the coming week also.

   

• The coming week will see some important dividend dates of companies like Glenmark, Indoco, Mastek, NLC, BEML, BDL, Century Ply, Heidelberg, PTC, Cochin Shipyards etc. But the big news will be the revival of the IPO market. The IPO mainboard will see the opening the IPOs of Sai Silk Kalamandir, SignatureGlobal and Vibhav Gems; while SAMHI Hotels, Zaggle Prepaid and Yatra Online will close next week. The SME space will see IPOs of Mangalam, Hi-Green Carbon, and Marco Cables opening while the SME IPOs of Holmarc, Collecor and Kody will close next week.

   

• The mega event in the coming week will be the US FOMC meeting outcome on 19th Sep. The Fed has already hinted at status quo on rates in September, but with the latest US consumer inflation reading at 3.7%, the Fed may either underline a rate hike in November or front-end the rate hike in September itself. It will be an interesting decision and will have larger implications for FPI flows and for RBI action.

   

• FPI flows were negative for the second week in a row and the next week could again see pressure. However, the narrative will be decided by two factors. Firstly, the spike in US bond yields to 4.33% led to the dollar index (DXY) crossing 105. It remains to be seen if the DXY trends higher like in early 2022 or retreats. Higher dollar index puts pressure on the rupee and not only spikes imported inflation but also hits the rupee value. RBI intervention is likely to be limited if the dollar trends are too strong. 

   

• Brent Crude at $94/bbl is the big concern. Every $10 spike in oil prices, hits India’s fiscal trade deficit by about 50 bps. For now, the supplies are likely to be under strain, so it will all boil down to demand and whether there are signs of demand slowdown. For now, the price of crude looks all set to head towards the $100/bbl mark.

   

• Finally, let us quickly take a look at the major data points from global macros. In terms of the US data flows, key focus will be on Fed rates, API oil stocks, current account, jobless claims, composite PMI, housing starts and existing home sales. In rest of the world (ROW) markets, the focus would be on inflation, current account and HCOB in the Euro region. In Japan, the focus would be on BOJ rates and trade balance, while in the UK the focus will on the BOE (Bank of England) rates, inflation, and retail sales

In short, it does promise to be an action-packed week, but the big trigger for the week will be the action points and the language of the Fed statement on September 19, 2023.

How much higher can the Nifty go?

The coming week will sustain the momentum in Nifty, but the journey from here gets tougher for the markets amidst all the macro headwinds. The good news, at a technical level is that the India VIX has faced resistance at 12, and has since cooled to below the 11-mark. As long as the VIX remains at low levels, it puts a floor on the market fall, and the market essentially remains a buy-on-dips market. The Nifty options data shows support at 20,000 levels and upside resistance at around 20,500 levels. Apart from low VIX, even the technical supports have now moved higher to the 20,000 levels of Nifty.

With most of the India macro data flows completed last week, the coming week would be largely about the language of the Fed at its FOMC meeting, apart from the dot plot and the impact on global portfolio flows. The undertone remains strong, although India inflation must not get out of control and the US must not put too much of hawkish pressure. The US FOMC meet will be the real centrepiece next week. For now, Nifty looks capped at 20,500.