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Market outlook for the next week (22January to 26 January)

23 Jan 2024 , 09:26 AM

IS SHORT TERM STORY DIVERGING FROM LONG TERM STORY?

In any stock market, there is always a short term story and a long term story. The long term story is about the fundamentals of the economy, the structure of the market, investor shifts etc. The short term story is the high frequency story and focuses on immediate concerns like data flows, quarterly results, global events etc. Let us first look at the long term story. Indian economy is poised to grow from $3.5 trillion to $5.0 trillion in the next 7 years. That is going to unleash big capex and consumer buying. Secondly, the capital investment cycle in India is finally looking and that has deep externalities, in terms of its impact on long term growth. Lastly, the Indian investor is coming of age. You only need to look at the surge in SIP accounts and demat accounts to understand that. 

Overall, long term story is just intact. The problem is that the short term story is diverging. FPI AUC (assets under custody) was 15% higher in December 2023, compared to previous peak of October 2021. That is a fit trigger for profit booking. Secondly, the US and India inflation is turning out stickier than expected. That means either the Fed will have to delay its rate cuts, or the Fed may not be done with rate hikes. Either ways, it is not too positive for markets. Thirdly, the quarterly results for Q3FY24 have betrayed some concerns in banks and FMCG stocks, which has had an impact on the stock prices. Lastly, FPI flows may look to diversify across geographies, especially considering the current valuations of Indian markets. 

WELCOME TO A TRUNCATED WEEK OF TRADING

The coming week is a truncated week of trading with just 3 days of trading available. Monday will be a trading holiday on account of the inauguration of the Temple at Ayodhya. Again, Friday will be a market holiday on account of Republic Day. With just about 3 days of trading and a long weekend coming up, the traders are likely to be extra cautious about carrying long positions over the weekend. In addition, even institutional investors with a high level of exposure to vulnerable stocks are likely to play it more defensive. The coming could see relatively tepid volumes and even FPI action is likely to be relatively limited. That means; we may have to wait for the last week of January for clear market trends emerging.

WHAT TRIGGERED THE MARKET MOVES IN THE PREVIOUS WEEK? 

Broadly, there were 7 factor that influenced the Indian equity markets, in the latest week to January 20, 2024.

  1. WPI (wholesale) inflation numbers were put out during the week and the December 2023 WPI inflation came in sharply higher at 0.73%. Between April 2023 and October 2023, the WPI inflation had been in the negative for 7 months in a row. In November, the WPI inflation had just turned around to 0.26% and in December it has touched 0.73%. The surge in WPI inflation was largely led by food products, even as fuel and core inflation remained flat to negative for December. Higher WPI inflation signals a spillover effect on consumer inflation, but it also means that producers get better prices.

     

  2. Trade deficit for December 2023 came in below $20 billion, which is good. However, the services surplus was lower on a sequential basis and yoy basis. That is not encouraging. The overall deficit, combining the merchandise trade deficit and the services surplus, was steady at $5 billion. Gold imports are back to haunt the deficit, but oil imports fell and exports of electronic and engineering goods spiked in December. Of course, the Red Sea impact is still not reflected in the trade numbers, but it is likely to have an acute impact on exports from January 2024 onwards. 

     

  3. Quarterly results from big names were below par. While cement and capital goods gave positive numbers, the pressure was visible in banking, oil and FMCG. The FMCG space is seeing pressure on the top line and the bottom line. Rural demand is taking longer to revive while FMCG companies have played out their arsenal with respect to costs to boost profits. The road ahead could be rockier if the rural demand picks up rapidly for the FMCG stocks. Auto story will play out this week. The big disappointment in the week was HDFC Bank. Not only did the deposit growth struggle to keep up with credit growth, but NIMs at 3.4%, were nearly 100 bps lower than the NIMs of ICICI Bank. 

     

  4. FPI numbers for the week were negative, but a lot more intense than the previous week. FPIs sold $2,033 million worth of equity in the latest week to January 20, 2024. The last two weeks of FPI selling comes after almost 10 consecutive week of FPI buying and more than $10 billion infused into Indian equities. The FPI selling in the latest week was triggered by two factors. Firstly, there was the lower than expected numbers reported by major Indian companies, especially HDFC Bank. Secondly, the spike in the US bond yields has raised some concerns about Indian equities. Both these factors were responsible in triggering a sell-off in Indian equities. However, the FPI selling in equites was largely offset by FPI buying in debt, so it looks more like capital allocation shifts.

     

  5. The Red Sea crisis continued to be the biggest threat to world trade and for the rupee sentiments. Houthi rebels in Yemen, with the alleged support of Iran, have been firing missiles on ships passing through the Red Sea. The issue is that the Red Sea connects the Indian Ocean with the Mediterranean Sea, the gateway to Europe and onwards to the US. This is a key trade route for Asia with the West and now the Suez Canal has seen a sharp fall in ship movement due to major shipping lines like MSC and Maersk opting to boycott the Red Sea route. Ships are now taking the Horn of Africa route which has led to a spike in freight rates and insurance costs; apart from delayed deliveries. This crisis is expected to hit Indian exports by $30 billion. The bigger challenge is that, imports are likely to get more expensive and it could trigger imported inflation. Higher oil prices could be the immediate concern for India and that is visible in market sentiments.

     

  6. The twin global macro variables of US bond yields and dollar index continue to remain in focus, especially after the spike in consumer inflation in the US by 30 bps. That was largely an outcome of high energy inflation even as food inflation and core inflation trended lower. However, the Red Sea crisis shows no signs of relenting and that means inflation may continue to remain elevated, something the recent Fed minutes had also alluded to. During the week, the US bond yields rallied from 3.91% levels to 4.14% levels and that had a sharp impact on FPI flows and on market sentiments. The dollar index also rallied from 102 to 103 levels and that is likely to keep the rupee on tenterhooks.

     

  7. Finally, among the various speeches at Davos, what stood out was the warning from Gita Gopinath of the IMF, not to be too optimistic about rate cuts. Gopinath has warned that aggressive rate cuts by the US Fed would be too much to expect, especially at a time when inflation was yet to be fully reined in and the consumer inflation stood a full 140 bps above the Fed target of 2%. The impact was also felt on the CME Fedwatch. From expecting 175 bps of rate cuts in 2024, they are down to expecting 125 bps of rate cuts. However, the Fed is not even confident it will be able to delivered the promised 75 bps.

In the coming weeks, we could seek FPI flows and US data driving the Indian markets. But one trend to watch out would be investors returning to the safety of large cap stocks.

STOCK MARKET TRIGGERS FOR COMING WEEK TO JANUARY 26, 2024

Here are some of the major stock triggers to watch out for in the coming week to January 26, 2024. With US data flows like Q4 GDP first advance estimates and PCE inflation, the market is likely to be more data driven. Here are the major triggers for the coming week.

  1. For the week, Nifty closed -1.47%, Sensex closed -1.52% lower and the Nifty Next-50 closes flat. Stocks were hit by FPI selling, which is expected to persist in the coming week. Among smaller indices, Mid-cap index was up +1.16% and small cap index closed lower by -0.17% as the alpha hunting appeared to gravitate towards the mid-caps. The coming week is likely to see the buyer bias shifting towards the large caps. 

     

  2. The week will see some important results coming out. Major large cap results this week include Axis Bank, Tata Steel, Cipla Ltd, Bajaj Auto, SBI Cards, Tata Chemicals and Indian Bank. Among mid-cap results, watch out for Karnataka Bank, Oberoi Realty, Blue Dart, Railtel, VST Industries, and UCO Bank among others .

     

  3. After a 6-day trading week, the coming week will have just 3 trading days, with Monday and Friday being trading holidays. With 2 trading holidays in this week, traders are likely to be cautious with relatively lower volumes. There is likely to be a hesitation to carry open long or short positions over the weekend.

     

  4. The week is likely to see two key data points from the US. The first advance estimate (FAE) of Q4 US GDP is expected to taper to 2%, after rising to 4.9% in Q3. That should help keep inflation in check. Also, the PCE inflation (the critical Fed input), will also be announced this week. The PCE inflation reading is expected to be flat for December 2023 at 2.6%, despite a sharp fall of 20 bps in the core PCE inflation. 

     

  5. BOJ and ECB are to announce status quo in interest rates this week. The sustained dovishness of Bank of Japan is likely to keep the yen carry trade buoyant. That may reverse FPI selling of $2.03 billion last week as yen carry trade is positive for FPI flows. However, one must not forget that US bond yields had spied by over 20 bps last week and that is likely to keep FPI flows under pressure in the coming week. 

     

  6. The coming week will be big on key pre-budget expectations, being the last full week ahead of the Union Budget announcement on the next Thursday. However, there are concerns that while the interim budget will still focus on bringing down the fiscal deficit, the trade-off could be lower capex commitment in the coming year. That is likely to hit the sentiments of the market in the coming week.

     

  7. Finally, we focus on the key global data points. In the US, the focus will be on Q4GDP, PCE inflation, API crude stocks, PMI, durable goods orders, building permits, and initial jobless claims. Focus in the EU will be on HCOB, ECB rates, PMI, and consumer confidence; while in Japan, the focus will be on BOJ rates, trade balance, PMI, and monetary policy minutes.

With limited data points, the markets in the coming week are likely to be influenced by the US data points and the FPI flows.

NIFTY NEXT RESISTANCE AT 21,850; SENSEX RESISTANCE AT 72,500

For the coming week, the Nifty is likely to hover between its support of 21,400 and resistance at 21,850 levels. However, it was another week of volatile VIX, which crossed 15, before settling around 13.2 levels. It is a sign that it could be a sell-on-rises market if FPI pressure persisted. Nifty and Sensex closed with losses this week, but it was largely on account of the banking sell-off. For the Nifty, the only concern is  that the underlying trend may have shifted from buy-on-dips to sell-on-rises. But, the big trend in the coming week could be a decisive shift to large caps over mid-caps and small caps; purely on risk perception.

 

Related Tags

  • GDP
  • IIP
  • inflation
  • MonetaryPolicy
  • nifty
  • Q3FY24
  • QuarterlyResults
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