Market outlook for this week (November 6 to November 10)

6 Nov 2023 , 07:02 AM

NIFTY, SENSEX BOUNCE, HELPED BY GLOBAL HEADWINDS

For the week ended November 03, 2023, the Nifty and Sensex fell gained more than 90 bps over the previous week’s close. Actually, the week began on a relatively flat to weak note. However, the Fed policy statement on November 01, 2023 changed the undertone of the markets. The Fed held the rates at the range of 5.25% to 5.50%. What impressed the market was that this was the third time in the last 4 Fed policies that the Fed had opted to maintain status quo on rates. While the tone of the Fed was still unerringly cautious, if not overtly hawkish, the CME Fedwatch interpreted this as a signal that the Fed may be done with rate hikes and may even shift to aggressive rate cuts by the coming year.

There was also some domestic data support for this bullish overtone in the markets. For instance, the core sector growth (infrastructure growth) came in positive at 8.13%. It was the fourth month in a row when the core sector growth stayed above the 8% mark. This is likely to have positive ramifications for the market. Secondly, the fiscal deficit update for the first half also showed the government of India on target to achieve its 5.9% of GDP target for FY24. But the real thrust to the markets came from the sharp fall in the US dollar index and the US bond yields. It was these two macro variables that had driven down the markets in the last few weeks. 

NEWS FLOWS FROM THE PREVIOUS WEEK TO NOVEMBER 03, 2023

There were 8 major factors that influenced the Nifty movement during the week just gone by; and it was a mix of domestic and global factors.

1. Several companies gave numbers that were lower than expected. This includes some big ticket players like Bharti and Tata Steel. Both companies took one-time hits during the quarter. Overall, several stocks have come under pressure in the last few weeks. A combination of higher input costs, weak global sales, tepid rural sales combined to put pressure on margins and profit growth. Also, depreciation costs and interest costs have been higher for most companies in the September 2023 quarter.

    

2. The big news this week was the Fed statement post the policy on November 01, 2023. The Fed, as was largely expected, held status quo on rates. The Fed had suggested that it would follow the policy of “Higher for Longer.” What it means is that the rates would be held at elevated levels for a longer period of time, instead of attempting to hike rates. Fed has been worrying that with the rates well above the neutral rates, any hike from here can be counterproductive. However, the Fed has also decided to put off rate cuts to a much later date in the future.

    

3. What the markets did read closely was the way the CME Fedwatch interpreted the Fed statement. After a long time, the CME Fedwatch is diverging substantially from the Fed view. The CME Fedwatch is suggesting that the Fed may be done and dusted with rate hikes in this round. Also, the CME Fedwatch expects the rate cuts to start in early 2024. While the Fed has hinted at maximum 2 rate cuts of 25 bps by December 2024, the CME Fedwatch is hinting at 5-6 rate cuts of 25 bps each by end of 2024. This aggression rubbed off on the stock markets across. 

    

4. In terms of India data, the core sector growth came in robust at 8.13%. This is the fourth month in a row when the core sector growth has been above 8%. Core sector is a collection of 8 infrastructure sectors and represents the aggressive spending on infrastructure that has been triggered by the government as an engine for future growth. The core sector also has 40.27% weight in the IIP and that is good news for industrial and manufacturing growth too.

    

5. The other major data point for the week was the update on the fiscal deficit. The data released by the Controller General of Accounts (CGA) shows that as of the end of the first half of FY24, the government had used up just about 39.3% of the full year fiscal deficit provision. That means; the government was not only likely to meet its 5.9% fiscal deficit target for FY24, but could even better it. That would have positive ramifications for FPI flows and for the value of the rupee. Even global rating agencies are likely to view such a development positively.

    

6. Let us now turn to the all-important combination of US bond yields on the 10-year benchmark and the Dollar Index (DXY). Just three weeks back, the dollar index (DXY) had crossed the 107 mark. In fact, the DXY has crossed the 107 mark only thrice in the last 40 years, with two of the occasions in the last 2 years. Buoyant dollar index implies a lot of dollar strength as it had continued to hover around the 106.50 levels. This week, post the Fed policy statement, the dollar index fell sharply from 106.88 to 105.02, which also triggered strength in the Indian rupee. The other big variable of US 10-year bond yields had touched a high of 5% last week, but closed this week sharply lower at 4.58%, a clear outcome of the Fed status quo on rates and the CME Fedwatch interpretation. Bond yields are already at the highest level in 16 years and it was already putting  a lot of pressure on the Indian bond yields and also on the Indian rupee. With this sobering of bond yields and the dollar index, Indian markets would have reasons to celebrate.

    

7. Pressure of FPI selling continued in the latest week. Look at the numbers and it is quite intimidating. In the latest week, FPIs sold $913 million of equities and marks the third week in the last five weeks, when the weekly FPI selling in equities has been to the tune of over $900 million. After selling equities to the tune of $1.49 billion in September, they doubled their selling to $2.95 billion in October 2023. In the last 4 weeks, FPIs have sold close to $2.40 billion in equities. Of course, this is still quite small compared to the $20 billion of inflows that came into equities between March and August. Also, domestic flows are still very strong, so the impact is largely minimized. However, the psychological and sentimental impact of FPI selling is still quite prominent.

    

8. In a big positive piece of news during the week, the United Arab Emirates plans to commit nearly $50 billion to Indian investments over the next few years. Most of these investments into India would be channelled through the sovereign wealth funds like Abu Dhabi Investment Authority (ADIA), Mubadala Investments, ADQ etc. These are likely to be sector agnostic fund, although a good deal of the money is likely to be allocated to emerging sector and futuristic technologies. If the funds materialize, it will be one of the most significant investments by the UAE based sovereign funds into India.

During the week, the markets showed a late bounce, after the Fed policy statement, as the Nifty closed above 19,200 and the Sensex above 64,300. The big question is whether this rally can sustain once the short covering is done; but we have to wait for that.

STOCK MARKET TRIGGERS FOR THE COMING WEEK TO NOVEMEBR 10, 2023

The next week is likely to be interesting in that apart from global macros and geopolitical risk, there is going to be Indian macro data, last round of Q2 results and some key speeches by Fed officials. Here is what will impact the market direction in the coming week.

• It was a positive previous week with Nifty closing 0.96% higher, Sensex 0.91% higher, Nifty Next-50 +2.39% higher, Nifty Mid-cap index +2.29% higher and Nifty small cap index up +2.58%. While the Nifty has immediate resistance at 19,300 levels, a lot more of alpha buying can be seen in the small cap and mid-cap stocks. The action is likely to be focused on these smaller stocks in the coming week. Also,  the positive cues from the US bond yields and the dollar index will be positive for BFSI stocks in India. 

   

• This will be the last week of big Q2 results with over 2,400 companies slated to announce numbers. Key large cap results include names like Divi’s Labs, Powergrid, Adani  Ports SEZ, Coal India, Eicher Motors, Hindalco, M&M, ONGC, LIC, and Shree Cements. The key mid-cap names announcing results this week include Tata Power, Nykaa, Lupin, Aurobindo, Bosch, Biocon, Bharat Forge, Emami, Sobha, and IRCTC.

   

• The week will be a busy week for the IPO market. The last week saw Cello World and Mamaearth see good response. The coming week will see the closure of ESAF SFB IPO, while the IPOs of ASK Automotive and Protean eGov Technologies will open next week. Also, Tata Technologies is likely to announce IPO dates in the coming week. Needless to say, the SME IPO segment will continue to contribute the numbers. 

   

• The big macro data point to watch this week is the index of industrial production (IIP), to be announced on Friday. The IIP had grown at 10.3% in August 2023 and September output is also expected to be strong. More importantly, the big contribution is likely to come from the manufacturing IIP. The positive signals are already there in the form of robust core sector numbers, which constitutes 40.27% of the IIP basket. 

   

• There are some key global macros that will be tracked closely in the coming week. Crude prices will continue to be in focus amidst the ongoing Israel / Hamas war. Last week, the price of Brent crude fell sharply to below $85/bbl. However, with West Asia on the boil, $100/bbl still look possible for oil. But the real data points to watch would be the US bond yields and the US dollar index. Last week, the US bond yields fell from 4.98% to 4.58% and the dollar index fell from 106.88 levels to 105.02 levels. This is likely to result in positive FPI flows in the coming week, but we have to wait and watch. More so since, FPIs have sold nearly $4.50 billion in equities in the last 2 months.

   

• With the CME Fedwatch probabilities of future interest rate trajectory diverging from the guidance of the Fed, the focus this week will shift to the speeches to be made by Powell, Waller, and Williams. The Fed takes its communication very seriously, so the markets would be very closely watching what the Fed members (especially Jerome Powell) have to say on this dichotomy. 

   

• Finally, let us turn to the other key global data points to watch out for. In the US, the focus would broadly be on Powell speak, Trade Balance, Household debt, API stocks, MBA mortgages, initial jobless claims, and wholesale inventories. Additionally, Indian markets will also look at other data points like Composite PMI, and retail sales in the EU region. In Asia, the focus would be on BOJ policy, composite PMI, household spends, and current account balance in Japan; as well as on the China Trade data, vehicle sales, and PPI (purchasing power index).

The key deciding factors in the coming week would be about how the dollar index and the US bond yields play out. That could hold the key to market performance next week.

NIFTY AND SENSEX RANGE MAY GET NARROWER THIS WEEK

For now, Nifty and Sensex look all set to trade in a very narrow range this week. For Nifty, it will be 19,200 on the downside and 19,300 on the upside. For the Sensex it will be 64,000 on the downside and 64,500 on the upside. The good news is that the VIX has hardly moved at 10.88 levels for the Nifty, largely limiting the downside risks. However, VIX has shown the tendency to shift in an unpredictable fashion in the past, more so with election season coming up thick and fast.