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Market outlook for this week (February 26-March 01)

26 Mar 2024 , 03:16 PM

A TALE OF 2 CENTRAL BANK MINUTES

The latest week saw the minutes announcement by two central banks. The US Fed and the RBI Monetary Policy Committee announced their minutes on February 21st and February 22nd respectively. The core thrust of the minutes was almost the same. Both the central banks see the scope for rate cuts, but are not exactly sure about when such rate cuts can commence. Hence, neither the US Fed, nor the RBI have given any time table for rate cuts. Also, both the US and the Indian economies have managed to control inflation and boost growth. In short, both the central banks have managed a soft landing. They have managed to ensure that rates are hiked to bring down inflation, without hurting the growth engine. 

GLOBAL MARKETS HAVE A SLOWDOWN STORY TO WORRY ABOUT

The latest week saw two of the largest and most influential economies in the world, officially slip into recession. We are talking about the UK and Japan. Between the, they constitute about $9 Trillion in GDP and almost the same amount in terms of market capitalization. That is a lot of financial heft. Last week, we did see the prices of oil falling in reaction to the UK and Japan slipping into recession. Of course, this is still a strictly technical definition. Both the UK and Japan have reported two consecutive quarters of negative growth in GDP, although for the full year, the GDP growth is still likely to be positive. But that has already sent jitters down global markets as such a slowdown could have larger repercussions for global demand and for global spending power. We have to wait and see.

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

It was an action packed week with several important announcements made and some reaction visible on commodity prices. Here are the 7 major news items that shaped the week ended February 23, 2024.

  1. The big news of the week was about the UK and Japan officially slipping into recession. Remember, this is just the technical definition of recession that the economy has continued to contract for two quarters in a row. Remember, even the US had seen two quarters of negative growth last year, but then bounced back into positive growth very soon. Hence, the last word has not been said, but the pressure points are visible and unless the aftermath is managed, it could have larger repercussion on global trade, commerce and on global stock market valuations. 

     

  2. It was the week when the RBI announced the minutes of the Monetary Policy Committee (MPC). In India, the RBI announces the minutes, exactly 14 days after the RBI policy statement. The broad reading is that rate cuts are not on the table for now. The members of MPC held status quo on rates and also on the stance; with Jayant Varma being the sole member expressing reservations about holding rates. RBI has held rates static since February 2023 and markets are now awaiting for signal on rate cuts. However, that is only likely after the elections are over and full budget is presented.

     

  3. It was not just the RBI, but even the US Federal Reserve published the minutes of its January 31, 2024 meeting. Remember, the Fed publishes the minutes of the meeting 21 days after the policy statement. The Fed minutes were also silent on the time table for rate cuts, but the Fed has underlined that they will wait for more tangible evidence on inflation falling further. Fed reiterated that the last mile was the toughest, so they did not want to take any chances. However, the good news is that the minutes clearly hinted that rate hikes were done and dusted. The estimate, now, is that rate cuts may commence only after June this year.

     

  4. All is not hunky dory in the start-up ecosystem in India. Two leading lights of the start-up space; Byju’s and Paytm are in a lot of trouble. Byju’s saw its market valuation dip by 90% and the promoters are even willing to raise money at such deeply discounted valuations. Meanwhile, Byju’s continues to default on its debt and is strung for cash, even as the ED has issued a look out notice to prevent Byju Raveendran from leaving the country. In the case of Paytm, it is more about a fintech operating in the financial grey area. To be fair, the RBI had given them enough warnings, but they were not heeded. It looks like both these start-ups have a long battle ahead and that is likely to have an impact on the start-up valuations and start-up IPOs in India this year.

     

  5. In another interesting development during the week, one of the world’s most respect investment house (Goldman Sachs) has downgraded the Indian banking sector. Goldman is specifically bearish on ICIC Bank and SBI at current levels. They are quite unhappy with the huge gap between the growth rate of loans and the growth of deposits. The real problem is; what happens next? The banks have to now go for higher cost deposits to fill the gap and that could compress margins. In last few quarters, banks saw a big boost to their net interest income (NII) and a sharp widening of the net interest margins (NIMs). This was because, the deposit rates never kept pace with the loan raters. Now, investors are finding bank deposits unattractive and the only option for the banks is to raise the rates on deposits. But, that would mean; lower margins and lower NIMs.

     

  6. FPI flows for the week were positive at $404 Million. Of course, a few swallows do not make a summer, so we need more data validation, but the bottom line is that FPIs are finally turning net buyers. They have continued to be net buyers in debt and this week FPI buying returned to equities also. There has been some sporadic buying after the budget and most of the support in the month has come from the IPOs and from debt. FPI flows into debt has continued to be robust due to the likely inclusion of Indian government paper into the JP Morgan and the Bloomberg bond indices. This is expected to bring in about $35 Billion of passive money into Indian debt. 

     

  7. Lastly, let us turn to oil prices, which edged lower to $81.5/bbl in the Brent Crude market at the close of the previous week. After the ceasefire talks failed, Israeli has become more aggressive in Palestine while the Houthis continued to aggressively attack s hips in the Red Sea route leading up to the Suez Canal. Increasingly, ships are taking the Cape of Good Hope route, with repercussions for delivery schedules, freight costs and insurance costs. However, the fall in oil prices this week came from the UK and Japan slipping into recession with 2 quarters of GDP compression. Both are big consumers of oil and account for nearly $9 Trillion of world GDP. That led to a sharp fall in the crude oil prices on demand concerns.

While the central banks have been cagey about committing to rate cuts, the sentiment drivers this week were the fall in oil prices, recession in UK & Japan as well as the banking downgrade by Goldman Sachs.

STOCK MARKET TRIGGERS FOR COMING WEEK TO MARCH 01, 2024

Here are key factors that will have a bearing on stock markets for the coming trading week from February 26, 2024 to March 01, 2024.

  • During the week, the Sensex closed +0.96% higher, Nifty closed +0.78% higher while Nifty Next-50 closed +0.97% up. The large cap rally was led by FMCG, banking and auto stocks, while IT and hydrocarbons put pressure on the market. Among the smaller indices, the Mid-cap index was +0.30% higher while the small cap index closes -0.12% down. Clearly, the smaller stocks are likely to face sustained resistance.

     

  • There are a number of key dividend record dates slated to fall in the coming week. This includes the interim dividends payable on stocks like Fineotex Chemicals, Gateway Distriparks, Natco Pharma, and Suprajit Industries, among others. Bajaj Auto also has its record date for the stock buyback slated for the coming week. 

     

  • In Big India specific data, the India Q3FY24 GDP will be published by MOSPI on the last working day of February. The street expectation is that the GDP for the third quarter ended December 2023 will be lower than 7.6% reported in Q2, but certainly above 7%. That is likely to keep the full year GDP at close to 7.2% growth, and the estimates will also include the projected full year GDP growth for FY24.

     

  • In other important data, the core sector (infrastructure) growth for January 2024 will be published in this week as will the fiscal deficit update as of the end of January 2024. The base effect for core sector is likely to harden, putting pressure on the core sector. For the fiscal deficit update, the markets will be watching for signals of whether the Indian economy is on target to restrict fiscal deficit to 5.8% of GDP for FY24 and further to 5.1% of GDP in FY25.

     

  • In key US data flows, with immediate relevance to India, the Q4 GDP second estimate and the PCE inflation estimate for January 2024 will also be published. The second estimate for Q4GDP in the US is expected to remain static at around 3.3%, with positive repercussion for full year US GDP. However, the US PCE inflation which had fallen to 2.6% last month, is expected to spike in January. This could delay Fed rate cuts further.

     

  • FPIs were net buyers in equities for the week to the tune of $404 Million this week, and were also buyers in debt. The coming week could see FPI flows returning to the market on the back of the Q3 GDP data in India. In addition, the positive move for India was that oil prices fell to $81.60/bbl amidst serious global demand concerns. With the UK and Japan officially into recession, demand for oil is expected to be impacted.

     

  • The IPO market is likely to be active in the coming week with total of 6 IPOs raising close to ₹3,300 Crore in the primary market.     Platinum Industries and Exicom Tele will open next week while Juniper Hotels and GPT Healthcare will list during the week. The action is likely to be robust in the SME IPO space also.

     

  • Finally, let us turn to data cues fro0m the US markets and the rest of the world (ROW). Key data points from US markets will include Q4-GDP, PCE Inflation, new home sales, building permits, durable goods orders, API stocks, jobless claims, and PMI. In ROW markets, it will be consumer confidence, PMI, and HCOB in the Euro zone. In addition, Chinese Caixin PMI reading as well as Japanese data points like inflation, retail sales, IIP, unemployment, and PMI will be closely tracked.

Overall, it is likely to be an action packed week for the markets, with data flows driving the colour and direction of Indian markets.

NIFTY AND SENSEX COULD CONSOLIDATE AT NEW HIGHS 

Nifty has support at 21,900 and resistance at 22,400 / 22,700 levels. The Sensex has support at 72,000 levels and resistances are placed at 74,500 and 75,000 now. With VIX at falling to below 15, some buying on dips looks very likely. The big challenge to watch out is the VIX levels, which is likely to get increasingly volatile as we approach elections. This week, the Nifty and the Sensex touched life time highs and they look to consolidated in the new high zone in the coming week also. However, post the Goldman Sachs downgrade, the banks could be in for a downgrade in the coming week. With the minutes behind, the next focus shifts to Indian data points like Q3 GDP, core sector growth and the fiscal deficit update. In terms of FPI flows, the US GDP data for Q4 and the PCE inflation will also be material.

Related Tags

  • IIP
  • inflation
  • MonetaryPolicy
  • nifty
  • sensex
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