Market outlook for this week (28-August to 01-September)

28 Aug 2023 , 07:18 AM

The latest week to August 25, 2023 marked the fourth consecutive week of negative returns on the Nifty. In the previous 3 weeks, the Nifty fell by 50 bps, 66 bps, and 61 bps. In comparison, the latest week to August 25, 2023 saw a fall of just 23 bps in the Nifty. That is because, both the heavyweight indices viz. Bank Nifty and the IT index rallied sharply but oil & gas took it on the chin. Of course, this was largely on account of the fall in Reliance Industries, which reacted to the series of down circuits in Jio Financial Services Ltd. The Nifty has not only struggled around the 20,000 levels, but in the last 4 weeks it has consistently made lower tops and lower bottoms, which is a sign of weakness in markets. One trend shift in the recent weeks is the spike in the VIX, which has now gone above 12. At these levels, it is tough to claim with any degree of confidence that the market downsides are limited.

The big event in the week was the RBI minutes announcement. While the RBI admitted that rate hikes were not done, the members now look increasingly worried about rising inflation. More so, considering that the retail inflation is expected to remain at elevated levels. This puts the RBI in a unique dilemma. If it raises the rates now, then the cost of funds could go up again and solvency of Indian corporates could get impacted. This will also spike the cost of borrowing for the government. Secondly, if it does not raise rates and the US Fed continues to stay hawkish, then we could have a situation where the US real rates are in the positive while India risks portfolio outflows due to the returns being much lower in India. This is a dilemma across central banks, as even Jerome Powell admitted while speaking at the Jackson Hole symposium. But, more about that later.

News flows from the previous week to August 25, 2023

There were 6 major news items that influenced the Nifty movement during the week just gone by.

1. The much awaited MPC minutes were published by the RBI. Across the board, members have been concerned about the rising inflation, although nobody is calling for a rate hike yet. But if you look at the way inflation is spiking in India, the question of rate hikes in India is not about whether but when. While all the six members of the MPC agreed on the need to hold rates at 6.5% to wait for full transmission to inflation, Jayanth Varma gave a dissenting not on the monetary stance focused on withdrawal of accommodation.. Varma felt that such a stance was at cross-purposes with macro policy.

    

2. The second big news of the week was the Jerome Powell address at the Jackson Hole symposium. Of course, Powell continued to harp on hiking rates till inflation came down to 2%. However, the US Fed has its own problems to contend with. If it hikes rates too much and too quickly, then it risks a sure shot recession in the US. That could hamper GDP growth and negate most of the achievements of the Fed in controlling inflation in the last 16 months. As Powell himself paraphrased at the symposium; for the Fed, the choice was between doing too much and doing too little with no clear demarcated lines between them. For now, it looks like inflation control will rule the roost.

    

3. Two of the most important macro variables in the Indian context; crude prices and USDINR, remained favourable for India during the week. Crude prices tapered to around $84.40/bbl after touching a high of $87.55/bbl just about 10 days back. This steadiness in oil prices has been largely because the supply cuts by the OPEC and Russia are being offset by weak demand in China. In addition, the dollar strength also works against the oil prices. The USDINR appreciated from Rs83.16/$ to Rs82.55/$ during the week, despite a sharp appreciation in the rupee despite strengthening of the dollar index (DXY) during the week. The real story of the week was in sustained RBI intervention in the currency market by selling spot dollars. That also led to a sharp fall in the dollar reserves.

    

4. Jio Financial Services Ltd listed on August 21, 2023 close to the discovered price of Rs261.85, but quickly met with selling pressure. Most of the selling pressure came from mutual funds with a substantial exposure to the Reliance group and to the BFSI space in general. The selling was not entirely unexpected as the stock was supposed to leave the benchmark Indian indices over the next few days. That resulted in heavy selling by index funds and index ETFs holding Jio Financial Services in their portfolios as rebalancing was required in tis case. This depressed the price of Reliance Industries too

    

5. There could be a silent bonanza for Indian equity markets. The small savings flows in FY24 were 43% higher than the same period of 2024. For the government it is a good signal as they have to worry less about borrowing in the open market, which has anyways been tough due to tight market conditions. It is now expected that the government may allow the EPFO to invest more in equities and equity funds so that the pressure on the bond markets is reduced. It is also in sync with the longer term principle underlying equity investment. India was the only country where short term money went into equities and long term money went into debt. That needed to be rectified.

    

6. One of the most important groups in the India equity story, Adani group, appear to be resurrecting its image quickly. For Q1FY24, the EBITDA of the group stood at Rs23,532 crore, which his 42% higher than the same quarter last year. The Adani group is also sitting on nearly Rs42,000 in cash and if that is factored in, then the net debt of the Adani group is just Rs18,690 crore. Net debt is gross debt minus the cash balance in the balance sheet. The company appears to be putting the Hindenburg saga behind and moving ahead with sustained confidence.

Going ahead, the focus would be more on the net impact of all that is happening in the US and in India. Global hawkishness is not great news, but RBI could be hiking rates aggressively to counter the effect of rising inflation and a hostile neighbourhood. For now, the colour of flows is still risk-off. 

Stock market triggers for the coming week to September 01, 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.

• Let us look at the indices first and start with the diversified indices. Nifty closed the week -0.23% down while the Nifty Next-50 closed +0.93% higher. The Nifty has been facing persistent resistance at the 20,000 levels and from there, the Nifty has been making lower tops. That is a weak structure. However, the mid-cap index was up +1.73% and small cap index was up +1.59%. The action is once again shifting out to the mid-caps and small caps with the highest alpha potential. 

   

• Markets to expected to react to the Jerome Powell address at Jackson Hole this week. In the address, Powell continued to toe a hawkish line, warning of more rate hikes if necessary. However, Powell also indicated that the Fed would have to choose between doing too much and doing too little. He was referring to the quantum of rate hikes, but it looks like the Fed will not ignore the growth factor, even it has to get more hawkish.

   

• The most important even of the Reliance calendar, its AGM, is scheduled on August 28, 2023. There are some major areas where investors expect clarity from the management of Reliance Industries. They expect guidance on what would be the IPO plans for Reliance Retail and Reliance Digital. Will they do an IPO or follow the Jio Financial route. Secondly, the markets are also expecting an update on the 5G rollout and plans for future rollout in the coming months. Above all, the investors will look for clarity on what happens to the oil to chemicals (O2C) business in the coming moths and what are the green energy plans that Relance proposes to implement in terms of a time schedule.

   

• There are some important macro data points expected this week. For instance, the core sector or infrastructure growth to be put out on Thursday August 31. It is expected to taper from 8.2% to 4.2% on the back of a higher base. The Q1 GDP number for the June quarter will also be put out in the last day of August and it is expected to be around 160 bps higher at 7.7% compared to the previous quarter. In terms of high frequency data points, the PMI manufacturing will be out this week, followed by the PMI Services and the Composite PMI.

   

• Two important US based data points will also be out with strong implications for India. The US Q2 GDP second estimate will be out on Wednesday August 30, 2023. With the first advance estimate at 2%, the second estimate is expected to be better. The other big data point in the US is the PCE inflation or the PCE price index. That is the inflation that is being used by the Fed in determining the outlook for Fed rates. That is expected to bounce slightly by 30 bps from 3% to 3.3% underlining that the Fed would most likely maintain status quo in September and hike rates in November.

   

• The oil and rupee prices could hold the key in the coming week. Last week, the crude prices steadied and the rupee strengthened against the dollar on RBI intervention selling spot dollars. Both these factors combined with be a key deciding point for FPI flows, apart from the quarterly results that the companies declare each quarter.

   

• It is a busy week for IPOs with Rishabh Instruments IPO opening in the week and the IPO of VPRP to close. In addition, the mainboard IPOs of Pyramid Technoplast and Aeroflex will list during this week. However, the attraction of SME IPOs continues to be robust in the Indian markets.

   

• Investors must keenly watch out for Q2GDP, PCE inflation, JOLTS, House Price Index, API stocks, jobless claims, non-farm payrolls and PMI for the US markets. In terms of other markets, there are certain preferences. Focus your data study on data points like EU jobs, inflation, HCOB, PMI; Japan jobs ratio, retail sales, construction orders, Jibun PMI; and China Caixin PMI.

In terms of domestic macro data flows next week, It would be all about India GDP, India core sector, India fiscal deficit as well as the PCE inflation data and the GDP data in the US.

Where is the market headed in the coming week?

In the latest week, the Nifty touched a 2-month low as it fell below 18,250 levels. As of data, the options data and Nifty charts are both hinting at a narrow range of 19,000 on the downsides and 19,400 for the Nifty on the upside. It must be noted that the VIX has spiked in the last few weeks and touched the highest level of VIX since May 2023. The rising VIX raises some serious questions about the sustainability of this rally. 

The stress of domestic inflation and global downgrades has given rise to a problem of flows into India and that is likely to be a key factor determining market. After infusing $17 billion between May and July 2023, the FPIs have infused just $1.29 billion in August so far.  For now, any fresh rally in the Nifty looks unlikely.