SECTOR WATCH – AUTO FLATTERS, SOFTWARE DISAPPOINTS
The week was again a week of mixed performance by some of the key sector having substantial weightage in the Nifty. Broadly, the week could be divided into the 3 classes of sectors in terms of sectoral performance.
- Let us start with the sector that flattered on the upside during the week. The auto sector gained more than 4.2% in the week with action across the four-wheelers and the two-wheelers during the week. Auto stocks were driven higher by expectations of a surge in demand and hopes that the RBI would also eventually commence rate cuts in H2. The Fed statement assuring 3 rate cuts in 2024 came as a major leg-up to the auto sector.
- Then there were the sectors that were neutral to positive during the week. In terms of the heavyweights, the banking sector, oil & gas sector and the FMCG sector were up during the week, but the gains were under 1%. Banking sentiments improved after the Fed hinted at 3 rate cuts in 2024. Oil prices were stable while FMCG is still seen as the proxy for the post-election recovery in consumer demand in India.
- The sector that actually disappointed for the week was the Information Technology (IT) sector which lost more than 6.17% during the week. Much of the fall happened on the last day of the week after global IT consulting major, Accenture, had cut its revenue growth guidance in dollar terms from the range of 2-5%, down to the range of 1-3%. This did not go down well with Indian stocks as the stocks cracked across the board with HCL Tech seeing the most price damage among the IT large cap peers.
It was a week in which the data flows were broadly positive. The US Fed hinted at 3 rate cuts to be delivered in 2024, which is the first such assurance from the Fed chair. Also, the long term projections indicate that GDP growth would be better than expected while inflation and unemployment would remain stable. The one overhang for the Indian markets in the latest week was the sharp fall in the Indian rupee, which weakened to a lifetime low of ₹83.55/$ after the dollar strengthened against the UK Pound and the Euro.
WEEK THAT WAS; THE GOOD, THE BAD AND THE UGLY
For the latest week to March 22, 2024, FPIs were net sellers to the tune of $314 Million. However, this comes on the back of $5.56 Billion of FPI buying in the 4 weeks prior to that. There were 8 key data points that influenced the markets during the week gone by.
- The Fed monetary policy statement was issued on March 20, 2024 which maintained status quo on rates, as expected. However, the positive news was that the Fed almost assured that there would be 3 rate cuts in the calendar year 2024. This is despite the fact that rate cuts would only start in the second half of 2024 and would be back-ended. The Fed did indicate that there could be fewer rate cuts in 2025, but it did not really matter.
- In addition to the Fed statement, the long term projections of key macros were also updated by the FOMC for the March quarter. The Fed upped its GDP forecast for 2024 and 2025 and has held its forecast for inflation and unemployment static. However, 2 things emerged from these projections. Firstly, core PCE inflation could be higher in 2024 and the overall rate program could be slower and more calibrated.
- US dollar index surged sharply in the week to above 104.55 after the Euro and the UK Pound weakened against the US Dollar. The weakening was after both the central banks indicated that rate hikes may be done and dusted; something that weakened the Pound and the Euro. This led to hardening of the dollar index (DXY) and a consequent weakening of the rupee. The rupee wakened during the week to a lifetime low of ₹83.55/$ and was under a lot of pressure on the last day of het week. The FPI selling at $314 Million was relatively small, but it did impact sentiments around the rupee.
- Oil was the other big story in the week. Brent Crude spiked to above $87.15/bbl during the week on expectations that the oil market would continue to remain under-supplied and persistent drawdowns of US inventories exacerbated the situation. Towards the end of the week, 2 factors pushed the oil prices to below $85/bbl. There were serious hints at a possible ceasefire deal between the Hamas and Israel at Qatar. Also, the strong dollar weakened oil since global oil is still denominated in dollar terms.
- During the week, there was one more factor impacting the FPI flows and the rupee value. Japan finally decided to end its negative interest regime after a gap of 17 years. This has led to concerns that the highly popular yen carry trade may start to unwinding. In the past, many FPIs used to borrow in yen to invest in other currency assets, but that could come to a halt if the Japanese interest rates turn into positive. That also had an impact on the FPI flows in the week.
- The week also saw key estimates for the current account deficit (CAD) for FY24 being put out; and most were positive. Economists had originally projected that the CAD for FY24 would be in the range of 1.5% to 2.0% of the GDP, which is moderately high. However, January and February have seen the services surplus almost wiping out the merchandise trade deficit. This has raised optimism and now economists are projecting that the current account deficit (CAD) could stay put at just about 1.0% to 1.1% of GDP for FY24.
- During the week, global IT consulting major, Accenture, lowered its revenue growth guidance for 2024. The reduction was quite sharp from the range of 2-5%, to the new range of 1-2%. That really spooked the Indian IT stocks a HCL Tech, TCS, Infosys and Wipro took it on their chin. The IT index corrected nearly 6.2% during the week, emerging as the worst performer in the week.
- Finally, there was also an element of surprise during the week. Amidst expectations of volatility in the markets, the VIX (volatility index) actually fell sharply to below the 12.2 levels during the week. The tax farming is still on and the last week of the fiscal year is likely to be a truncated week with just 3 trading days. With the F&O expiry also coming up on Thursday, it could be the proverbial lull before the volatility storm next week.
After the sharp fall in the previous week, the current week to March 22, 2024 saw a moderate bounce. The bounce could have been much bigger, had it not been for the weakness in the IT sector. The good news is that even the small caps and the mid-caps bounced during the week, although it looked more like some hectic short covering.
STOCK MARKET TRIGGERS FOR COMING WEEK TO MARCH 29, 2024
Here are some of the key triggers that will have a bearing on stock markets for the coming trading week from March 25, 2024 to March 29, 2024.
- After the sharp fall in the previous week, the latest week saw all the major indices closing in the positive. The Sensex closed with gains of 0.26%. Nifty closed with gains of 0.33%, and the Nifty Next-50 closed 1.95% higher. In addition, even the mid-cap index ended the week 1.34% higher while the small cap index closed 1.41% up. The generic indices were under pressure due to the IT sector sell-off while the small and mid-cap stocks are likely to see short covering in the coming week also.
- The coming week to March 29, 2024 will not only be the last week of the fiscal year FY24, but it will also be a truncated week. Markets are shut on Monday on account of Holiday while the markets would also be shut on Friday due to Good Friday. With the VIX still at 12.2, we could see a last week spike in volatile as the tax farming would be completed in this week. With trading for just 3 days and an F&O expiry in between, one can expect elevated levels of volatility next week.
- In a key macro data point, the RBI will announce the current account deficit (CAD) update for Q3FY24 on Thursday. Last quarter, the current account deficit had come in at $8.3 Billion. Q3 could see some pressure due to the record merchandise trade deficit in October, but it could at best be marginally higher. Q4 CAD would be a lot more relevant as that is expected to have substantially boosted the services trade surplus.
- There are likely to be two more key macro updates in the coming week. The Fiscal deficit update as of the close of February 2024 will be provided by the Controller General of Accounts (CGA) on the coming Friday. While the fiscal deficit is on target, this 11-months data will give the first clear picture of whether the target of 5.8% fiscal deficit in FY24 and 5.1% in FY25 is achievable. These are CAD expressed as a percentage of GDP. Apart from the fiscal deficit, the core sector growth could also see pressure on higher base effect. There is also likely to be some pressure on the core sector due to a slowdown in capex spending by the government in the last quarter of FY24.
- In global data points, the markets will be closely tracking to major data points in the US. Firstly, the third and final US Q4 GDP estimates and the full year GDP estimates for 2023 will be out on Thursday. Q4 US GDP is likely to be flat at 3.2%, with full year GDP for 2023 pegged at 3.1%. The other major data point this week will be the PCE (personal consumption expenditure) inflation to be announced on Friday. For February 2024, the PCE inflation is expected to have edged up, especially the energy inflation component.
- After the dollar rally last week, the US dollar index (DXY) will be closely tracked due to its impact on the rupee. Last week, the dollar index appreciated to 104.55 levels taking the Indian rupee to an all-time low of ₹83.55/$. However, experts suggest that the dollar strengthening against Euro and Pound may have already overplayed for now.
- IPO action in the coming week will be very tepid in the mainboard segment with just one IPO of SRM Contractors coming in, and that too having a size of just about ₹130 Crore. However, as is normal around quarter ends, the week is likely to seek 12 SME IPOs in the coming week. That will keep the IPO markets busy.
- Finally, for other global data points. Key tracking data points in the US next week include Q4-GDP, PCE Inflation, new home sales, building permits, durable goods orders, API stocks, initial jobless claims. In rest of world markets, the key data points will include Consumer Confidence (in EU), BOJ minute and retail sales (in Japan), current account update (in China), and GDP and current account deficit (in the UK).
Let us finally turn to what this means for the Nifty and the Sensex in terms of likely movement in the last week of fiscal year FY24.
BE PREPARED FOR A VOLATILITY SPIKE IN NIFTY AND SENSEX
For the week, the Nifty supports are placed at 21,950 and 21,750 and Resistance at 22,200 and 22,450. The Sensex has a support at 72,000 and resistance at 74,000 for the week. However, a spike in volatility could be the real challenge in a truncated week as VIX is expected to spike next week during the F&O expiry. At the close of the week, VIX fell to 12.2 levels, but that just about makes it very ripe for a sharp spike next week, with just 3 weeks of trading available. The coming week may be directionless in a range as domestic funds normally support the market around the reporting March end. However, upsides could still predicate on the election outcome in May 2024.