Nifty technical charts are signalling overbought condition, but overseas portfolio investors still look gung ho on Indian equities, and bank stocks have just started a solid rebound. Analysts say while Nifty’s upside looks capped, the broader market appears to be readying for a lot of action.
BSE Sensex gained 1,032 points, or over 2 per cent, to 39,467 during the week gone by amid hopes of progress in Covid vaccine development, which offset fears about a rise in virus cases and a spike in US-China tensions. Nifty added 276 points for the week to end at 11,647.
A policy tweak by the US Fed to target ‘average inflation of 2 per cent,’ which analysts say promises to keep interest rates low for a long time to come and boost flows to emerging markets, was another shot in the arm. Back home, RBI Governor Shaktikanta Das added to investors’ confidence, saying the central bank has not exhausted its ammunition to deal with the pandemic-induced stress.
That said, the week ahead is going to be a busy one with a host of macro-economic data releases, some of which may have a bearing on market behaviour. Going by the buzz on Dalal Street, here are the top 10 factors that are likely to guide the market going forward.
GDP & infrastructure output data
The start of September is going to be data heavy, with infrastructure output data for July and first quarter GDP estimates from the National Statistical Office due on Monday. Rating agency ICRA is projecting a 25 per cent contraction each in GDP and the gross value added (GVA) at basic prices in year-on-year (y-o-y) terms. But analysts said that kind of a bleak scenario is already in the price.
Auto sales numbers
Auto majors will announce their monthly sales data for August from September 1. Nomura analyst Kapil Singh expects August wholesale volumes to benefit from a continued recovery in retail sales and inventory filling for the forthcoming festive season. However, they would still be below August 2019 levels, indicating that there is a lot of catch-up to do yet. He said his interactions with the industry showed retail sales have largely come back to pre-Covid levels in the passenger vehicles segment and two-wheeler retail sales are at the 80 per cent level.
Market participants will be looking forward to the Markit Manufacturing PMI, scheduled to be released on September 1. The IHS Markit India Manufacturing PMI declined to 46 in July 2020 from 47.2 in the previous month. The latest reading pointed to a fourth straight monthly contraction in factory activity, as some businesses remained closed amid coronavirus lockdown extensions. Markit Services PMI will be out on September 2. The IHS Markit India Services PMI increased to 34.2 in July 2020 from 33.7 in the previous month. However, it still pointed to the fourth-sharpest deterioration in services activity in nearly 15 years of data collection.
Stock margin pledge rule from Sept 1?
The new mechanism on margin pledge in cash market is due to come into force from September 1. But the Association of National Exchanges Members of India (Anmi) on Friday urged markets regulator Sebi to extend the implementation till September 30. The association said the margin pledge process is still incomplete. “The implementation of the new system, if not postponed, is likely to result in market disruption, as operations at the depositories have not stabilized. Besides there is mismatch noticed in UCC (unique client code) database, which is required to be corrected before the process is started,” it said.
Overseas portfolio flows
August has seen the highest inflows from foreign institutional investors into the domestic shares in at least 118 months so far, or since October 2010. They have put in Rs 46,602 crore in equities on a net basis so far this month, as excess liquidity in global markets found its way to emerging markets, including India. Nirali Shah, Senior Research Analyst, Samco Securities said the US Fed’s intention to keep interest rates at rock-bottom levels for an extended period even if inflation kicks in is an important hint that the world will witness a great deal of liquidity for a longer period of time. “This will inflate prices of various asset classes such as gold, metals and equities. Any change in stance can only be expected post January 2021 when new US President comes to power. Till that time, financial markets might enjoy higher levels of liquidity which will aid the bull’s party,” she said.
The domestic currency on Friday surged by 43 paise to 73.39 against the US dollar, its best closing in nearly six months, buoyed by sustained foreign fund flows and weakness in the greenback against major global currencies. Any further appreciation in the rupee may support sentiment next week. Being a net importer, market analysts believe an appreciating rupee would benefit Indian economy. A stronger rupee helps bring down imported inflation. “High interest rates and a stronger rupee will give a boost to returns that foreign investors can earn on fixed income instruments and that will attract even more investments. However, sectors like software, automobile and ancillaries, pharmaceuticals and textiles will be affected as significant portions of their revenues are dollar-denominated,” they said.
Nifty50 formed a big bullish candle last week after witnessing increased participation from the banking stocks, which closed with the gains of almost 10 per cent in last five sessions. The rally in the banking index led Nifty50 to surpass a brief resistance at 11,530. However, market participants are advising traders to remain careful about the fact that the benchmark index is at overbought and the potential upside might be limited.
However, Nagaraj Shetti of HDFC Securities said, “The near-term trend of Nifty continues to be positive. A sustainable movement next week is likely to pull the index towards the next upside target of 12,000 and higher.”
‘Dollar Deluge’ remains a dominant factor for Dalal Street, and the latest surge in stocks has been driven mainly by a huge gush of liquidity. Some analysts say any consolidation or a mild pullback of the Dollar Index may temporarily put the brakes on the unabated rise in Nifty. The dollar fell further on Friday as the US Fed’s new policy framework suggested that interest rates would remain low. In practice, market participants expect that the ultra-low rates will keep pressuring the dollar. The Japanese yen has strengthened significantly against the dollar after Prime Minister Shinzo Abe’s resignation, adding to that pressure. That’s in some way good news for emerging markets.
US-China ties deteriorated further over the past few weeks amid rising nationalism in both countries in the run-up to the US presidential election and build-up of forces by both sides in the South China Sea and Taiwan Strait, which some strategists say significantly raise the possibility of a “conflict through miscalculation and escalation” ahead of the November 3 vote. The collapse in diplomatic engagements between the two superpowers has heightened the risk of any incident escalating into a crisis. While financial markets have thus far taken these developments in their strides, any further escalation may trigger risk aversion, and impact stock markets.
On the global front, investors will be eyeing macro-economic reports from world’s largest economy, the United States, starting with the Dallas Fed Manufacturing Index on August 31, followed by Redbook, Markit Manufacturing PMI on September 1, Factory Orders, Fed Beige Book on September 2, Balance of Trade, Initial Jobless Claims, Markit Services PMI, Export and Import on August 3 and finally Baker Hughes Oil Rig Count on August 4.