Market outlook for this week (March 11 to March 15)

11 Mar 2024 , 09:25 AM

WHY THE POWELL TESTIMONY WAS SIGNIFICANT THIS WEEK

Jerome Powell testified this week in front of the Senate Banking Committee of the US House of Representatives (Congress). This testimony assumes significance as it is made under oath and is an important part of the Fed communication. There were 5 important things Jerome Powell testified in front of the Congress; having significance for the global financial markets.

• Powell testified that the Fed had maintained status quo on rates since July 2023 to allow the lag effect of the rate hikes to fully play out. The idea now is to hold rates higher for longer. That also implies that rates would not be hiked in the normal cycle, unless exceptional circumstances demanded a hike in the Fed rates.
• Powell also enumerated on how the tightening was rate hikes since March 2022 was magnified by the shrinking of the Fed balance sheet. For instance, between March 2022, and January 2024; the Fed balance sheet had shrunk from $9.2 Trillion to $7.5 Trillion. Now, the Fed may be cautious on the taper to avoid liquidity crunch in the economy.
• As is the practice, Powell abstained from giving any forward guidance on rates and stuck to his stand that such decisions would be based on data flows. However, Powell did underline that peak of the current interest rate cycle may have been reached with rate cuts more likely than rate hikes at the current juncture.
• While Powell did insist that rates would not be cut till there was clear evidence of inflation moving towards 2%, he did indicate to the house that the year 2024 was likely to see the start of rate cuts. He remained silent on the quantum and timing.
• Fed was still reconciling to the dilemma of too little versus too much. If the Fed was too frugal in cutting rates, it could impact economic growth; but if Fed cut rates too fast, then inflation could become uncontrollably high.

In short, there were concrete signals from the Fed that inflation would fall during this year.

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

While there were not too many data flows in the week, there were several other factors that had an impact on the markets. Here is a quick look at 8 such factors.

• We have spoken at length on the all-important Fed testimony by Jerome Powell. Here the focus will be on how this testimony impacted the price of gold. After the market factored in rate cuts of 75 bps to 100 bps (as evidenced by the CME Fedwatch, for 2024; the move triggered a rally in equities and also in gold. Gold touched a lifetime high of $2,200/oz which was triggered by lower rate hopes. A fall in interest rates reduces the opportunity cost of holding gold and hence makes gold more valuable. The last 2 weeks have seen a very sharp spike in the price of gold, making it one of the best performing asset classes for investors.
• Flows into mutual funds continued to be robust during the month of February, as per data put out by AMFI. Flows into active equity funds spiked to a 23-month high of ₹26,866 Crore. In addition, SIP flows in February 2024 scaled a record high of ₹19,187 Crore while the NFO flows were at over ₹11,200 Crore. The flows into small cap funds fell due to the warnings by SEBI, but thematic funds dominated this month, led by the NFO of SBI Energy Opportunities Fund, which accounted for 60% of all NFO collections in February 2024.
• FPI flows for the month of February stood at $919 Million. This is the third consecutive week of meaningful FPI flows and these FPIs have now infused $2.07 Billion into Indian equities in the last 3 weeks. Of course, FPI flows into debt continue to be robust, but this week we saw robust inflows from FPIs in the equity secondary market as well as into the equity primary (IPO) market.
• Crude oil prices were the other big story of the week. It had two converse factors playing on the price. On the one hand, the upcoming OPEC meet is expected to hold supply cuts and on the other hand the Red Sea crisis is still festering. Both are likely to push oil prices higher. Pushing the oil prices downward is the story of UK and Japan slipping into recession, which led to fears that oil demand may be impacted. As a result, the price of crude stayed in a narrow range of just about $1.50 movement in the week.
• After the Fed testimony, the US markets saw a sharp fall in the US bond yields and also the dollar index. Typically, the bond yields and the dollar index tend to show a spike when the signals are that rates will be hiked. However, now that Powell has indicated that rate cuts will happen in 2024, it led to lower levels of the 10-year bond yields in the US as also the dollar value.
• The big question in the week was whether Tata Sons would go for an IPO. A recent report by Spark Capital suggested that Tata Sons, the holding company of the Tata group, may have to look at an IPO, considering that it is classified as a significant NBFC due to its size and its level of borrowings. However, it is not clear if the Tata group itself would be keen to list Tata Sons, which they had taken private about 4 years back. For Tata group, the current structure is more suited for the group to exercise control over the Tata group companies. The Spark Capital report had pegged valuations of Tata Sons at close to $96 Billion, but we have to wait and watch if it happens.
• As part of the group restructuring, which has been one of the themes since N Chandrasekhar took charge of Tata Sons; Tata Motors will separate its PV (passenger vehicles) and CV (commercial vehicles) businesses into separate listed entities. The company expects that this splitting will translate into better allocation of capital and also better valuations for the new age businesses within the group. The overall impact is likely to be positive and could pave the way for a full-fledged restructuring within the Tata group. Other auto companies with a strong EV franchise may also follow suit.
• Finally, in a positive signal, Moody’s Investors Services upgraded India’s GDP growth estimate for FY24 to 8%. This is the first official estimate that has pegged India’s GDP growth at this level. Even the RBI still pegs the rate of growth for FY24 at 7.0% while the MOSPI itself has pegged at 7.6%. This move by Moody’s is in line with the market wisdom on GDP growth. with first 3 quarters of FY24 showing over 8% GDP growth, the momentum is unlikely to relent for the Indian economy. This looks like a logical step and we may see more such estimates gravitating towards the 8% mark.

It may not have been a week of news or data flows, but the Fed testimony by Powell, gold price rally and the Moody’s GDP upgrade do stand out.

STOCK MARKET TRIGGERS FOR COMING WEEK TO MARCH 15, 2024

Here are some of the key factors that will have a bearing on stock markets for the coming trading week from March 11, 2024 to March 15, 2024.

• Nifty closed the previous week up +0.69%, Sensex was up +0.51%, and Nifty Next-50 closed +1.37% higher. The large cap rally was largely triggered by the sharp rally in banking and auto stocks, while IT applied pressure on the Nifty and Sensex. Mid-cap index ended the week +0.36% higher while the small cap index closes -2.18% down. Clearly, the undertone of the market has shifted from Alpha to Beta and that has made the large caps more preferable for investors.
• The week will also see some key corporate action record dates of some of the key companies. In terms of dividend payouts, the record dates (RD) of IIFL Capital Services, SBI Life Insurance, and Kirloskar Ferrous are expected this week. On the Bonus / Split front; the record date (RD) of Gujarat Ambuja Exports Ltd (GAEL), Waree Renewables, and MK Proteins are slated to be out this week.
• The coming week will be a big week for inflation data. The US inflation data will be announced by the US Bureau of Labour Statistics (BLS) on Tuesday, March 12th 2024. For February, the US consumer inflation is likely to remain static at 3.1%, but core inflation is likely to be lower by 20 bps, which would still be positive. On the India inflation front, CPI for February will be announced on Tuesday with the consumer inflation to be flat but food inflation likely to taper in the month. This will again raise hopes that the RBI may look to front-end rate cuts in the Indian economy.
• On the growth front, the IIP data is also expected on Tuesday and the Producer Prices data (on WPI inflation) on Thursday. The IIP growth for January 2024 (1-month lag) is likely to exceed 4% on the back of the sharp manufacturing push. At the same time, WPI inflation (which is a barometer of producers prices, is likely flat at 0.27% for Feb-24
• India merchandise trade data will be announced on Friday and it will set the tone for the FY24 current account deficit (CAD). Apart from the merchandise trade deficit, the real area of interest will be the quantum of services surplus and how much is the net overall deficit, which is what impacts the current account deficit. If CAD can trend below 1% for the third quarter, it would be a positive flows.
• FPI flows at $919 Million this week has resulted in $2 Billion flows in the last 3 weeks. However, with oil prices steady and bond index inclusion likely to trigger debt market flows, expect FPI participation to still be robust next week. A related area of focus will be the crude oil prices in the Brent market which was in the $82 to $83/bbl, this week. While the OPEC meet and Red Sea problems are likely to spike oil prices; UK, and Japan slipping into recession are likely to limit sharp upsides to the oil prices.
• For the week, the US bond yields and dollar index trended sharply lower in the week. However, with the Powell testimony confident of rate cuts in 2024, the bond yields and DXY are likely to remain subdued.
• The coming week will be a busy week for the IPO markets. On the mainboard, there are a total of 2 IPO openings and 3 listings this week, while SME segment will continue to drive the IPOs in terms of number of issues.
• In global triggers; the key US data points include consumer inflation, API inventories, PPI, retail sales, jobless claims, business inventories, IIP, capacity utilization. In rest of the world (ROW) data points, watch out for industrial output in the EU region; Q4-2023 GDP and machine tool orders in Japan and; vehicle sales and housing price index (HPI) in China.

The coming week will be fairly data heavy in terms of growth and inflation numbers; both in India and in the US. They will be the key triggers to watch out for.

UPSIDES COULD BE CAPPED FOR NIFTY AND SENSEX

For the week, the Nifty has support at 22,200 and resistance at 22,700 levels; while the Sensex has support at 74,000 and upsides up to 75,000. However, with the VIX lower at 13.61 levels, there could be buying on every dip. However, the upsides are likely to be limited up to 22,700 on the Nifty and 75,000 levels on the Sensex. However, it must be noted that Nifty and Sensex are already in uncharted territory and valuations are still around 22X FY24 rolling earnings. Based on FY25 forward, the valuations would be a lot more reasonable. That should favour the markets. Markets will take a cue from inflation and growth data this week; but the big question will be what happens to oil amidst diverse forces impacting oil prices?