Market outlook for this week (December 26 to December 29)

26 Dec 2023 , 07:35 AM

NIFTY AND SENSEX IN UNCHARTED TERRITORY

At the current juncture, both Nifty and Sensex are in uncharted territory. Both have recently touched their all time highs and that means two things. Firstly, short covering will continue till the remaining shorts in the market are squeezed out. Secondly, there will be the fear of missing out (FOMO), which will push many retail investors into equity markets. Remember, FOMO does not apply only to the retail investors but also to the HNI investors and the institutions. After all, no investor can remain waiting in the sidelines when stocks are giving up to 20% to 30% returns in a single month. The only choice is to jump in the bandwagon even if it means taking some downside risk along the way. This peer pressure typically drives a lot of short erm flows into the market at historic levels of the Nifty and the Sensex.

HOW WILL FPI FLOWS PAN OUT THIS WEEK?

This being the last week of the year, the FPI flows could be relatively tepid. Most of the institutions are taking their yearly off and so the activity in the markets would be quite limited at this point of time. Secondly, volumes normally tend to be lower in the last week of the year and that generally makes investors wary of participating in the market. There is a third more practical reason for limited action in this period. Most FPI managers get their year-end bonus based on the performance for the full year. Having secured bonuses, most of the FPI fund managers would not want to risk any disruption of returns in the last week and hence they are normally quiet during this phase. All these factors, plus the fact that it is a truncated week, will keep the overall FPI participation in this week quite tepid.

TWO BIG GAMECHANGERS FOR THE INDIAN MARKETS

If you look back at the market movement in the last few weeks, there are two factors that have fundamentally been game changers for the Nifty and the Sensex, in terms of underlining the intensity of the rally. The first factor was the India GDP growth. At 7.6% for Q2, the GDP growth came in nearly 60 bps better than expected. This comes on top of the 7.8% growth in the first quarter. The net impact was that the RBI in its December MPC policy statement hiked the growth estimates for FY24 by a full 50 bps to 7.0%. That was one of the first big factors to trigger a rally in Indian stocks. Of course, subdued inflation in the US and in India also helped sentiments, but it was all about the growth push.

The second big factor that proved a game changer for the markets was the US Fed turning dovish. The US Fed, which had been only talking about rate hikes since early 2022, has now guided that it will cut rates thrice in 2024 and four times in 2025. However, CME Fedwatch went aggressively ahead and pencilled in 7 rate cuts of 175 bps in the year 2024 itself. Even if the truth is somewhere in between, it was an indication from the Fed that hawkishness was unlikely and the only thing left is for the Fed to officially change its stance. This has opened up the possibility that even the RBI would follow suit and cut rates at a future date. 

WHAT TRIGGERED THE MARKET MOVES IN THE PREVIOUS WEEK? 

Broadly, there were 5 factor that influenced the Fed flows into the Indian equity markets, although the Nifty and Sensex had a rangebound close.

1. Much of the market action in the week was triggered by the sharp fall of 330 points in the Nifty and the 933 points in the Sensex on Wednesday last week. The trigger came from two points. Firstly, the Red Sea crisis and Houthi rebels firing at cargo ships in the Red Sea was having an impact on the risk premium on oil. The second big factor that led to the sharp fall on Wednesday was the renewed scare of the JN.1 variant of the COVID virus. After Singapore issued an advisory, other countries are also getting warty. In India, there is not much of a scare, but government is in a state of preparedness as casualties are already starting to show up. This will be closely watched in coming weeks.

    

2. The big news in the week was the RBI announcing the minutes of the December MPC meeting. The RBI had maintained rates and the stance when it announced the policy. However, two things emerged clearly from the discussion of the MPC members. Firstly, there is a consensus that growth was robust and hear to stay. In other words, the risks of hard landing that was being touted for the Indian economy, don’t look realistic any more. The MPC minutes also indicate that although the Fed may have announced rate cuts, the RBI may not be in a hurry considering the volatile nature of Indian inflation. 

    

3. During the week, the US Bureau of Economic Analysis (BEA) announced the third and final estimate of third quarter GDP. The first estimate had been pegged at 4.9%, but was upped in the second estimate at 5.2%. However, the third and final estimate has again come in at 4.9%. This is lower than the second estimate but in absolute terms it is much higher than the first and second quarters. The fourth quarter is pegged to slow to around 2.7% GDP growth, but the full year GDP growth is still likely to remain robust in the range of 2.6% to 3.0%. The Fed has already upgraded the full year GDP growth by 150 basis points between June and December and shows the kind of momentum in favour of GDP growth in the US. That is likely to translate into better export performance of Indian goods and also a pick-up in tech spending.

    

4. The fourth major item was the PCE inflation announced by the BEA on Friday. The Fed normally looks at PCE inflation and not consumer inflation to take a view on interest rates. The PCE inflation, based on personal consumption expenditure, has been pegged at 2.6% for November, sharply lower compared to 3.0% for October 2023. PCE inflation has now fallen by 80 bps in the last two months and by a full 180 bps since April 2023. In addition, the fall in PCE inflation has been triggered by a fall in food, energy, and core inflation. With the sharp fall in PCE inflation coming in after the Fed decision to cut rates, it is possible that the Fed may either intensify its rate cuts or even front-end the rate cuts, the way the CME Fedwatch is indicating. After all, at 2.6%, PCE inflation is just about 60 bps away from the long term sustainable inflation target of 2.0%.

    

5. Finally, let us look at the 4 factors that typically impact the momentum  of the markets viz. oil prices, USDINR rate, US bond yields and the US dollar index. Firstly, let us look at oil prices. There was a spike in oil prices despite the possibility of higher supply with Angola leaving the OPEC. However, the short term risks are about the Houthi rebels holding the Red Sea route to ransom. That is likely to make oil more expensive in the coming weeks. The US dollar index fell sharply to 101 levels but the USDINR actually weakened during the week. Clearly, the markets are jittery ahead of the Current Account Deficit (CAD) data next week. On the US bond yields front, they fell to 3.9% after the PCE inflation also came in sharply lower. However, the Indian bond yields in the week stayed robust at 7.19% levels as there are concerns that domestic and imported inflation could see a sharp spike in the coming months. 

The above factors broadly explain the activity in the markets during the week. They also explain why FPIs are back in droves and the markets are scaling new highs. However, the activity in the previous week was largely driven by the sharp fall in the Indian Nifty and Sensex on account of the JN.1 variant risk and the worsening situation in the Red Sea trade route. This is likely to hike the costs and push up inflation once again. That is something the RBI and the Indian markets have been wary of.

STOCK MARKET TRIGGERS FOR COMING WEEK TO DECEMBER 29, 2023

The previous week saw the Nifty and the Sensex closing with marginal losses of around 50 bps. However, there are a number of triggers for the stock markets in the coming week.

• Nifty closed the week -0.50% down, Sensex down -0.53% and the Nifty Next-50 -0.03% lower. The Nifty struggled at the 21,400 mark while the Sensex struggled at the 72,000 mark during the week. Apart from the front line indices, the Mid-cap index fell by -1.08% while the small cap index closed -0.27% lower. Alpha buying in the small caps and mid-caps may have taken a back seat, but they are still the preferred names for retail investors. Selective alpha buying is already going on here.

   

• The week is likely to see rangebound movement with low volatility as the last week is normally a tepid week for volumes. Also, Monday is a trade holiday so it is going to be a 4-day trading week for the markets. The FPI holiday season is also likely to keep the market tepid and range bound. After all, most trades done want to take chances with their returns in the last few days of the year. 

   

• The two overbearing events in the coming week will be the progress on the Red Sea situation and the update on the JN.1 variant of COVID virus. Houthi rebels have been persistently firing on Red Sea vessels making the passage of oil longer and also costlier. On the other hand, the JN.1 variant remains confined for now, but there are effects starting to show up in many parts of India.

   

• OPEC membership crisis is likely to impact oil prices in coming week, although the Red Sea may still be the driving factor. With Angola moving out, the onus is on Nigeria, Gabon, and Algeria, whether they want to stay on in the OPEC or exit. An exit from OPEC will also give these nations the liberty to negotiate business with China. 

   

• With FPI flows likely to remain tepid in the coming week, all eyes will be on the Current Account Deficit (CAD) data for Q2 to be announced on Friday. The second quarter is likely to remain muted amidst the strong services surplus, offsetting the merchandise trade deficit. However, the risk of CAD overshooting 2% int this year is still strong.

   

• In big data flows this week, the core sector growth and the fiscal deficit update will also be issued on Friday this week. The core sector growth has already been above 8% for 5 months in a row and its sustenance holds the key to GDP growth. On the IPO front, expect big listings of Muthoot Microfin, Motisons, RBZ Jewellers, Happy Forgings, Suraj Estate, Azad, and Mufti during this week.

   

• Finally, let us turn to the key data points from global markets. The US focus will be on Initial jobless claims, API stocks, pending home sales, and signals on the trade front. Data will also focus on Q3 Current account surplus of China and Japanese data points like unemployment, jobs ratio, housing starts, retail sales, and construction orders.

The coming week is likely to be relatively tepid and the actual action may only manifest in the first few weeks of January 2024.

NIFTY RESISTANCE AT IS 21,600 AND SENSEX RESISTANCE AT 72,000

With Nifty in uncharted zone, above 21,000 and the Sensex above 71,000; there are no real technical barriers and the F&O data also appears to be ambivalent. However, the VIX has spiked to 13.5 levels, so the market undertone is likely to face more risks at higher levels. The next big targets will be 22,000 for the Nifty and 75,000 for the Sensex. However, the fight is just going to get that much harder from the current levels.