Market outlook for this week (October 30 to November 3)

30 Oct 2023 , 07:26 AM

NIFTY, SENSEX FALL AMIDST GLOBAL HEADWINDS

For the week ended October 27, 2023, the Nifty and Sensex fell by around 2.5% over the previous week’s close. The reasons were not hard to seek. Despite the strong data flows from the US, the markets were spooked by the rising US bond yields and the spike in the dollar index. For India that has been a double whammy. It means higher cost of funds and a weaker rupee leading to imported inflation. To add to the confusion, the West Asia standoff between Israel and Hamas is only worsening by the day. If Iran and Saudi Arabia get sucked into the war, it is likely to have large scale repercussions for oil prices. That is something that the markets have been quite worried about in recent weeks.

Behind the obvious reasons for the fall in the market, there is a bigger story playing out. It has to do with a possible strategy shift by the Fed in the upcoming statement to be issued on November 01, 2023. With inflation firmly stuck in the range of 3.4% to 3.5% and GDP at 4.9%, the Fed has the luxury to change tack to a more aggressive and hawkish approach. It may be a brief spurt of rate hikes to quickly push the inflation down to the 2% mark and then h old it there. With the latest data on PCE inflation and GDP growth, the markets are not entirely ruling out that possibility and such a hawkish stand could push the RBI into a tight corner. It surely appears like an interesting and critical week ahead.

NEWS FLOWS FROM THE PREVIOUS WEEK TO OCTOBER 27, 2023

There were 6 major factors that influenced the Nifty movement during the week just gone by; and it was a mix of factors; but largely predominated by global factors.

1. Reliance results were announced late on Friday and the numbers were relatively impressive. RIL reported 29.7% growth in net profits in Q2FY24 to Rs19,878 crore, despite lower revenues from the oil to chemicals (O2C) business. While the finance costs increased by 25% yoy due to higher cost of funds and higher debt, the depreciation costs also went up by 29% on the back of higher asset base. However, there was solid traction from the digital business and the retail business, which have started to dominate the EBTIDA contribution of RIL, even as the contribution of O2C has been relatively tepid. The numbers were largely in line with expectations with revenues below estimates.

    

2. The US third quarter GDP first estimates came in at 4.9%. This is not only higher than the previous quarter growth of 2.1%, but also higher than the street estimate of 4% for Q3. The surge in growth came largely from higher consumer spending and a surge in the contribution of services to GDP. The real thrust, obviously came from the consumer spending side, which is likely to raise some serious questions about the efficacy of the lag effect of previous rate hikes impacting inflation. That is also likely to impact the stance of the monetary policy to be announced by the Fed on November 01, 2023; which is the big event for the next week.

    

3. The other big data point that came out this week was the US PCE inflation, which the Fed uses as the benchmark to decide on rate action. For the third month in a row, the PCE inflation, based on personal consumption expenditure, remained static at the 3.4% level. Now what would worry the Fed is that this is still 140 bps away from the 2% inflation target of the Fed. Inflation remaining static at 3.4% for three months in a row is likely to once again force the Fed to reconsider its rate approach. The Fed would be taking a look at the PCE data in conjunction with the GDP growth data and that could have a bearing on the monetary stance when the Fed announces its next monetary policy statement on November 01, 2023.

    

4. 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 been above 107 only three times in the last 40 years, with two of the occasions in the last 2 years. It implies a lot of dollar strength as it has continued to hover around the 106.50 levels putting the Indian rupee under pressure. The rupee, not surprisingly, slipped sharply in the last 2 days of the week. The other big data point was the US bond yields. After touching 5% in the week, it retreated to around 4.85% levels on bond buying. However, the spike in yields may not be over as it is a bet that the US Fed may revert to its hawkish stance. Bond yields are already the highest level in 16 years and it is already putting  a lot of pressure on the Indian bond yields and also on the Indian rupee.

    

5. Geopolitical risk and crude oil prices are closely related, and all the more so at the current juncture. Just as crude was tapering late last month from $96/bbl to $84/bbl on long unwinding, the situation in West Asia worsened with the Hamas launching an attack on Israel. That has now caused a full-fledged war and the result is that crude oil in the Brent market is now back to $91/bbl. While dollar strength continues to be a technical dampener for oil prices, what is boosting oil prices right now is the geopolitical strife in the Middle East and West Asia. It is likely that, very soon, Iran and Saudi Arabia may be pulled into this conflict and that would mean a problem for the oil movement in the Straits of Hormuz. That has kept crude prices under pressure.

    

6. Finally, the pressure of FPI selling continued in the latest week, being one of the worse weeks in recent memory. FPIs sold $987 million in the latest week in equities with about $1.25 billion being sold just in the last 2 days of the week. If you look at the first 4 weeks of October, FPIs have already sold over $2.55 billion in equities, the higher sell-off by FPIs this year since January 2023. What is saving the day for FPI flows is the predominance of FPI flows into debt, which is triggered by surpluses held in Indian vostro accounts of Russian oil exporters to India. For the year to October 2023, FPI inflows  from IPOs and debt markets combined has been more than $7.5 billion. However, the pressure on secondary market equities continued unabated.

During the week, the markets fell vertically with the Nifty and the Sensex falling below key support levels of 19,000 and 63,000 respectively before bouncing back on Friday. It remains to be seen, what happens once the short covering is over.

STOCK MARKET TRIGGERS FOR THE COMING WEEK TO NOVEMEBR 03, 2023

The next week is likely to be interesting in that apart from global macros and geopolitical risk, there are also critical India data flows. Here is what the stock markets are likely to focus on in the coming week.

• For the week to October 27, 2023; the Nifty and the Sensex closed the week -2.51% down, while the Nifty Next-50 closed -1.59% lower. Friday rally looks like short covering so the next week will hold the key. However, there appears to be a deeper concern on valuations in the mid-cap space with the index cracking -2.95% and the small cap index down -2.23% in the week. It seems alpha hunting will remain in the background for now.

   

• This is likely to be another major week of key quarterly results to be announced. Big large cap Q2FY24 numbers include companies like State Bank of India, Larsen & Toubro, Tata Motors, Bharti Airtel, Tata Steel, Sun Pharma, Titan, Hero Moto, and Adani Enterprises. Relatively smaller stocks like Ambuja Cements, Bank of Baroda, Indian Oil Corporation (IOC), DLF Ltd, Godrej Consumer, LIC Housing, Dabur, Escorts Kubota, and Bharat Dynamics will also announce Q2 results this week.

   

• Two very important IPOs will open in the coming week on the mainboard. Cello World Ltd will be raising Rs1,900 crore via offer for sale (OFS), while Honasa Consumer Products (Mamaearth & BBLUNT) will raise Rs1,701 crore via its IPO this week. There is also a slew of smaller SME IPOs up on the radar in the coming week.

   

• Focus on the big global macros will continue to be the cutting edge for markets. Crude prices will be in focus amidst the Israel Hamas standoff; and that is not getting any better. Last week, Brent closed above $90/bbl and the Middle East situation makes $100/bbl likely for crude. With the US bond yields near 5% and the dollar index in the range of 106 to 107, FPI selling looks all set to continue in the coming week also. FPIs are likely to end October with the second highest selling of the year after January 2023.

   

• Make no mistake; the biggest event of the week will be the 2-day meeting of the Federal Open Markets Committee (FOMC), which starts on October 31 and ends on November 01, 2023. This will culminate in the Fed statement to be put out on November 01, 2023 followed by the interview with Jerome Powell. The market consensus is that the Fed will hold status quo on rates at the current level. However, the markets are looking at something much bigger. There are concerns that with GDP robust at 4.9% in Q3 and PCE inflation static at 3.4%, the Fed may want to rapidly push inflation to 2%. That may mean a surge of rate hikes in the coming months. That will be a bold shift in stance and could change the equations in the global markets overall.

   

• There are some important India specific data points this week. Core sector growth for September will be out and it has been above 8% for 3 months in a row. Some tapering is expected. Fiscal deficit for H1 will be evaluated against the full year target of 5.9%. Other important high frequency data flows for the market this week will be the festival season auto numbers for October as well as the PMI manufacturing and the PMI services for October 2023. 

   

• Finally, the global data flows will be on the watch list. Key US data points to track for the week include API crude stocks, composite PMI, JOLTS, factory orders, vehicle sales and unemployment rate; apart from the Fed statement. In Europe, the focus will be on EU GDP, jobs, and EU economic sentiments as well as UK BOE rates, PMI, and housing prices. In Asia, the focus will be on BOJ rates, jobs, and PMI in Japan while the China focus will be on the composite PMI.

It is going to be a week with an array of data points. Of course, the big news will be the outcome of the US Fed statement on November 01, 2023.

WILL NIFTY AND SENSEX GET STUCK IN A RANGE?

For now, Nifty and Sensex look all set to trade in a much wider range this week. For Nifty, it will be 18,800 on the downside and 19,500 on the upside. For the Sensex it will be 63,000 on the downside and 65,000 on the upside. The good news is that the VIX has hardly moved at 10.9 levels for the Nifty, largely limiting the downside risks. However, in a volatile global environment, VIX can shift in an unpredictable fashion.