Market outlook for this week (April 8-April 12)

8 Apr 2024 , 07:48 AM

CAN CRUDE OIL GET BACK TO $100/BBL?

Oil has been under pressure for some time now. In the latest week, the price of Brent crude crossed $91/bbl and the global traders are already betting that oil may get back to $100/bbl. That has also led to sustained build-up of long futures on oil. Here are five reasons why the price of crude oil is expected to scale to $100/bbl in the coming weeks.

• Globally, oil demand is a key driver of oil prices. Supplies can be quite a difficult topic since the large producers of oil are quite spread out now. However, demand is what drives prices in the short run. While UK and Japan are having growth pangs, markets are betting on the sharp economic growth in two economies that are the largest and the third largest consumers of oil. We are talking about the US and India, where GDP growth continues to be very robust with India likely to report 8% GDP growth for FY24.
• The ongoing geopolitical conflict in West Asia is widening. After recent alleged attacks on Iranian Assets in Syria by Israel, Iran has threatened to retaliate. This is most likely to take the form of a proxy war, which means the Red Sea will continue to be a place best avoided. The higher freight costs and the insurance costs will keep the price of oil elevated in the coming weeks, pushing them closer to $100/bbl.
• The OPEC meeting is scheduled this week and it is very likely that the OPEC Plus will commit to continuation of supply cuts. While they may not deepen the supply cuts, this time around Russia and OPEC appear to be cooperating on getting better prices for oil on a sustained basis. That is likely to keep the price of oil elevated in the coming weeks.
• The US has seen consistent drawdowns on its reserves in the last few weeks. While there have been occasional weeks of positive addition to reserves, the net impact has still been negative. Ironically, today the US is pumping oil at a record pace and also exporting oil at a record pace. That explains why the oil inventories are under stress, but for now it is likely to keep the price of crude under stress.
• Finally, let us not forget the dollar story. In the last few weeks, the dollar has been consistently strengthening after the Fed hinted at delayed rate cuts. However, that is not likely to help the US considering that they have huge interests in other currencies and cannot afford a strong dollar for too long. That means, the US will embark on rate cuts at some point and that would mean a weaker dollar. Since crude is denominated in dollars, weaker dollar will only harden oil prices in dollar terms.

Amidst the economics and the geopolitics of oil, it is the latter that is likely to be the swing factor. Markets are hoping that the Iran-Israel conflict would defuse and die a natural death. However, the Red Sea looks to remain a sea of contention.

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

For the latest week to April 05, 2024, the markets were low on news and data flows. Here are 7 key data points that influenced stock market direction this week.

• The week was less about data and more about the spillover of the previous week data. In the last week of March 2024, the current account deficit data had been announced early in the week, but other data points like the US GDP Q4 estimates, US PCE inflation, India core sector growth, and India fiscal deficit update; were announced after trading on March 28, 2024. Hence, the current week saw much of the impact of the data.
• The FPI outflows in the week were relatively tepid at around $39 Million. In the last 3 weeks, the FPIs have seen net outflows of $713 Million. However, that is not too much if you consider that FPIs had infused $5.56 Billion in four weeks prior to that. This looks more like an outcome of weekend adjustments. The markets would be happy that FPI flows into debt continues to be robust; as that would surely keep the rupee buoyant.
• Oil prices were the big story of the week as it crossed the psychological $90/bbl mark and actually closed the week well above the $91/bbl mark. The record US oil output was having little impact on sobering prices as the US continues to see drawdown on reserves. In addition, the price of oil was reacting largely to the worsening tensions between Iran and Israel. The problem is that these are two powerful nations in the region and their conflict could become bigger. Also, it could spread to the Arab Peninsula and the Straits of Hormuz (which moves most of Asian oil).
• Government revenue numbers were extremely gratifying. For instance, the total revenues came well above the revised estimates of ₹34.2 Trillion. The government also got record inflows in the form of dividends from PSUs, which largely made up for the shortfall in disinvestments of PSUs. Above all, this gives an indication that the fiscal deficit may be controlled at under 5.8% of GDP in FY24 and at 5.1% of GDP in FY25.
• The Indian markets also saw some pressure from higher gold prices. Normally, gold acts as the antithesis of equity market performance since gold is a preferred asset in times of economic and geopolitical stress. Amidst doubts over global asset classes and the worsening situation in the Middle East, the gold prices touched a record level of $2,329/oz during the week. Amidst the equity frenzy, there is a rush for safety too.
• During the week, the dollar index crossed 105 briefly before tapering. Also, the US bond yields closed higher at 4.4% after it was clear that the Fed may not really consider rate cuts till July this year. The Fed governor speak indicates that several members are sceptical about committing on rate cuts considering the fluid macroeconomic situation and widening gap with target. That did put the market under some pressure.
• Year FY24 was a year of bumper gains on the Nifty and smaller generic indices. The Nifty closed FY24 with gains of 30%, while the mid-cap index closed with gains of 62% and the small cap index with gains of 72% respectively. This stellar performance by the smaller indices is despite the late sell-off in the smaller stocks due to a clampdown by SEBI and its instruction to mutual funds to go slow on small and mid-cap fund flows.

At the end of the day, the one thing that continued to be robust was the investment cycle. Big global investors and Indian companies are very positive about investments towards fresh outlay and capacity expansion. That is  a positive signal. Consider these examples. Ultratech Cements, owned by the Aditya Birla group, has laid out a ₹35,000 Crore investment outlay in the coming years to expand its capacity and widen its gap with Adani Cements. In another case of global investor optimism, Blackstone group is planning to invest $2 Billion each year into India. They want to repeat their realty magic in equities too. This is in addition to Temasek already looking to expand its commitment to India. That is a lot of good news.

STOCK MARKET TRIGGERS FOR COMING WEEK TO APRIL 12, 2024

The coming week will be dominated by a series of data flows. Inflation in India and the US will be closely watched by the markets in the coming week. However, there will also be other data points to watch out for. The key data points this week will be India inflation, US inflation, India IIP reading and the FOMC minutes. However, the big data point will be how oil prices move and whether they get closer to the $100/bbl mark this week?

• For the week, the Nifty closed 0.84% higher while the Sensex closed 0.81 % higher and the Nifty Next-50 closes 3.42% higher. The large caps continued to attract interest, with banking among the preferred sectors. However, the week also saw a very sharp recovery in smaller stocks as the mid-cap index gained 4.05% and the small cap index gained 7.10%. It looks like the retail alpha seekers have decided to put the recent warnings behind them and go ahead in search of alpha.
• The crude oil prices will continue to be the major data point to watch in the coming week. In the last week, the crude prices closed at above $91/bbl. This is more so in the light of the worsening geopolitical situation and Iran and Israel moving closer to a full-scale conflict. With growth robust in India and the US, the price of crude oils is likely to stay elevated at above $90/bbl in the coming week too.
• The US consumer inflation data will be out in the week. In the light of the higher crude oil prices globally, the Bloomberg consensus is expecting the CPI inflation in the US to spike by 20 bps from 3.2% to 3.4%. That would largely rule out any rate cuts till July 2024, or possibly even beyond that. That is likely to be viewed negatively by the Indian equity markets. Also, the core inflation gains are likely to be limited in the US now.
• Another factor determining market direction in the coming week will be the CPI India inflation to be announced towards the end of this week. The CPI inflation is expected to taper from 5.09% to 4.90% as per Bloomberg consensus estimates. However, that would largely depend on the oil price impact. What the markets are betting on is that with a record Rabi harvest this year, the food inflation reading should stabilize this month.
• If inflation is one side of the India macro story, the other side is industrial growth. That is likely to be another positive story for the latest month. The Index of Industrial Production (IIP) is expected to bounce from 3.8% to 6.0% for February 2024 (IIP is put out with a lag of 1 month). This bounce is on the back of a lower base and improved manufacturing IIP.
• Another key data point to watch out this week will be the Fed minutes of its last March meeting. That is expected to be announced later this week. While the Fed has been clear about not cutting rates before July, the individual member discussion are likely to give a better granular picture. There is apparently a lot of internal dissonance on the rate strategy and that is likely to be visible in the dot plot charts of the individual FOMC members during the week.
• In IPO action, there is only one listing of the Bharti Hexacom IPO in the coming week. There are no new IPOs opening on the mainboard, although there is a lot of action in the SME IPO space. The ₹4,275 Crore IPO of Bharti Hexacom closed on April 05, 2024 and, despite its large size, got subscribed more than 29 times, with 45% anchor allocation. That bodes well for the IPO story in the coming week.
• In global data; key US data points include FOMC minutes, CPI inflation, Fed member speak, API crude stocks, PPI, Fed balance sheet, and consumer inflation expectations. In ROW markets, key triggers are ECB Policy, Rate Decision (EU); current account, industrial production (Japan); and GDP, Industrial Output, Trade Balance (UK).

The coming week will be fairly action packed, with inflation being the nucleus.

NIFTY AND SENSEX NEARING UPPER END PREDICTIONS

Both the Nifty and Sensex are now close to our upper end predictions of 22,700 and 75,000 respectively. The next trigger will only come once these levels are decisively broker with volumes. That will be the only resistance levels, while supports are much lower from current levels and so the downside surprise could always be there. However, sharp falls may not happen with the Nifty VIX at 11.34, despite this being an election year. That will keep the market in buy-on-dips zone. Oil will be the variable to watch out for next week.