Market outlook for the week (16-Sep to 20-Sep)

17 Sep 2024 , 12:36 PM

SECTORAL STORY IN THE WEEK TO SEPTEMBER 13, 2024

The week to September 13, 2024 saw the Nifty and the Sensex closing with smart gains, largely on the back of hopes that the Fed would go aggressive on rate cuts. The markets did correct on Friday, but that was more on account of the uncertainty ahead of the colour of the policy statement to be put out by the Fed on September 18, 2024. The week saw the US inflation coming in subdued at just 2.5%. Combined with the rather ambivalent labour data, the setting is perfect for a rate cut, although it is still uncertain whether the Fed will look at 25 bps or 50 bps to begin with. Here is a quick look at how the 20 key sectors performed in the week to September 13, 2024, in terms of weekly returns.

Sectoral Index	Weekly Returns	Index (13-Sep)	Index (06-Sep)
Nifty Consumer Durables	3.73%	43,081.10	41,531.10
Nifty India Digital	3.50%	9,745.30	9,415.80
Nifty FMCG	2.99%	65,062.80	63,175.70
Nifty Private Banks	2.95%	26,075.55	25,328.80
Nifty IT	2.76%	43,394.35	42,228.90
Nifty Banks	2.69%	51,938.05	50,576.85
Nifty MNC	2.48%	31,470.65	30,708.30
Nifty Metals	2.29%	9,370.65	9,161.15
Nifty Realty	2.09%	1,053.65	1,032.10
Nifty Mobility	1.72%	22,415.18	22,035.82
Nifty Healthcare	1.70%	14,695.45	14,449.80
Nifty Logistics	1.64%	24,982.98	24,578.75
Nifty Infrastructure	1.63%	9,333.75	9,183.90
Nifty Automobiles	1.15%	25,820.85	25,527.15
Nifty PSU Banks	0.91%	6,715.30	6,655.05
Nifty Non-Banks	0.77%	27,460.66	27,251.11
Nifty Energy	0.04%	42,229.40	42,212.45
Nifty India Defence	-0.17%	6,844.81	6,856.74
Nifty CPSE	-0.19%	6,994.60	7,007.70
Nifty Oil & Gas	-2.61%	12,684.25	13,024.55

Data Source: NSE

Here are key takeaways from the tabulation of weekly sectoral returns above.

• Let us start with the macro picture for the week to September 13, 2024. Out of the 20 key sectors, the gainers clearly dominated, on expectations of aggressive rate cuts by the Federal Reserve. A total of 17 sectoral indices gave positive returns for the week, with just 3 sectoral indices recording negative returns. The sectors that gave positive returns showed substantial gains, due to the shift to defensives. The losses were deep only in the oil & gas sector, while the other two losing sectors fell only marginally.
• Let us start with the story of the top gaining sectors for the week. The top gainers was dominated with defensives. Among the top gainers in the week were Nifty Consumer Durables with 3.73% gains, Nifty India Digital 3.50% gains, Nifty FMCG 2.99% gains, Nifty Private Banks 2.95% gains, and the Nifty IT Index with 2.76% gains. The theme was a shift to defensive plays, even at the cost of higher valuation multiples. The bets on consumer durables and FMCG are on the back of revival in rural demand while the bets on IT and digital were on revival of the US economy post the proposed rate cuts. Private banks were the surprise package of the week.
• What about the sectors giving negative returns. There were only 3 sectors giving negative returns in the week, out of which Nifty India Defence Index fell by -0.17% and the Nifty CPSE Index by -0.19%. There was sharp fall only in the oil & gas index, which fell by -2.61% for the week. This fall was largely on the back of the sharp fall in crude oil prices, which even briefly dipped to $68/bbl, before bouncing back. Lower crude oil prices puts pressure on the realizations of oil extraction companies and also on the gross refining margins (GRMs) of the refinery companies.
• With 17 out of 20 sectors giving positive returns in the week, the arithmetic average of returns of these 17 gaining sectors stood at 2.06%, while the arithmetic average of the 3 losing sectors stood at -0.99%. what stood out in the week was the strong spread of positive performance. Out of the 17 companies giving positive returns in the week, 2 sectors gave over 3%, nine sectors gave over 2%, and 14 sectors gave over 1% returns.

During the week, Nifty VIX fell sharply from the 15.5X levels top the 12.4X levels; which raises hopes of a buy-on-dips strategy coming in soon into the markets. For that, the VIX has to settle closer to 11X  levels. However, a lot will depend on the Fed action this week.

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

The week started on a tentative note ahead of the US inflation data, but closed quite strong. However, the markets did come under pressure on Friday as investors preferred to stay cautious over a long weekend. For now, all eyes will be on the Fed for setting the tone for the market action in the coming week. Here are some of the key events of the week.

• For the month of September, there were two key data points in the US ahead of the policy statement viz. the jobs data and the consumer inflation. The jobs data had come in the previous week at 4.2%, raising concerns of a likely impact on growth. In this week, the US consumer inflation came in lower by 40 bps at 2.5%. This is in line with the PCE inflation reading and even lower than the expected rate of 2.6%. This surely paves the way for a rate cut on September 18, 2024, even opening up the possibility of a slightly more aggressive rate cut.
• On the surface, the US inflation data looked quite benign; but scratch the surface and there are some distinct problem areas. For instance, the food inflation was down by 10 bps although the oil inflation dipped deep into the negative on the back of sharply lower crude prices. However, the area of concern would be that the core inflation still stays elevated at 3.2% and is a good 120 bps above the headline inflation target of the Fed. It also shows that the supply chain gains may have saturated for the time being.
• Back home in India, the CPI inflation for the month of August 2024 came in at 3.65%. The positive story is that; inflation was expected to spike due to a lower base, but that was not the case. While food basket remained subdued, the core inflation has bounced from 3.1% to 3.4% in the last 2 months. It does look like supply chain normalization story may have played out in India too. The rural inflation continued to be sharply higher than urban inflation and that raises doubts over whether the rebound in rural spending and rural demand can genuinely happen.
• It was a week of big FPI flows with FPIs infusing an imposing $2.01 Billion in the week to September 13, 2024. The foreign portfolio investors (FPIs) have now been net buyers for 4 weeks in a row, infusing nearly $6.70 Billion in the last 4 weeks. If you take a slightly longer perspective of 100 days since the Modi 3.0 government formation, the FPIs have infused nearly $15 Billion into Indian equities. Clearly, the FPI sentiments turned strongly positive in the week, with a clearer glide path to be decided after the Fed policy.
• During the week, the MOSPI also announced the index of industrial production (IIP) growth for the month of July 2024. IIP is normally announced with a lag of one month. The IIP growth came in at 4.84%, indicating positive tidings since the base was already higher by around 213 basis points. Also, the June 2024 IIP growth has already gone through the first upward revision from 4.24% to 4.73%, raising hopes of an upgrade for the July IIP too. Interestingly, the cumulative IIP is stuck around the 5.2% and that could be a trigger for the RBI to start cutting the repo rates; in the interest of GDP growth.
• It was another week when the price of Brent crude fell sharply. Although it dip to around $68/bbl, it did bounce late in the week to close around $71/bbl. The sharp fall in oil prices came after recent reports by Citigroup and Bank of America suggesting that Brent Crude prices could dip to around $60/bbl, or even lower. That led to rapid unwinding of long positions in the oil futures market. With growing tensions between the Arab nations and the African nations within the OPEC, the OPEC is keen to ensure that more countries do not leave the cartel, which could undermine its position. Already, rising supplies from non-OPEC nations and weak demand from the US and China, have put the oil prices under pressure. At lower levels, reserve buying and replenishing demand could offer support to crude oil prices.
• The first signs of a likely dovish stance by the RBI has come from the 10-year benchmark bond yields in India touching a 30-month low of 6.81% during the week. This was a direct outcome of the belief that if the Fed turns dovish, then RBI would follow suit to avoid the risk of monetary divergence. That has already raised expectation that the RBI may start cutting rates when it meets in October. Also, Indian repo rates are 135 bps above the pre-COVID rate making a strong case for a rate cut. In addition, the real rates in India are also above 2%, against the median level of around 1%. A rate cut by the RBI will surely reduce stress on Indian companies by lowering the cost of funds.
• RBI intervention in the currency market will be in sharp focus. Even as the dollar shows signs of weakening amidst expected rate cuts, the rupee has continued to weaken in line with the other emerging market currencies. It is ironic since the crude prices are also sharply down. It is just that the highly profitable yen carry trade is not profitable any longer and that is restricting the rupee strength. For now, the RBI has been supporting by selling dollars at the 84/$ levels, but that will be the level to watch.

The action now shifts to the Fed meeting outcome on September 18, 2024. More than the quantum of the rate cut, it is the Powell speech and the language that will hold the key to FPI flows in the coming week.

STOCK MARKET TRIGGERS FOR COMING WEEK TO SEPTEMBER 20, 2024

Here are some of the key stock markets triggers that can influence the direction of the stock markets in the coming week to September 20, 2024.

• The generic indices bounced sharply last week. Nifty bounced by 2.03%, Sensex 2.10%, and NSE Next-50 1.30%. The bounce was a lot more pronounced in the large caps with defensives as the theme. In the coming week, we could see a shift to aggressive plays if the Fed cuts rates by 50 bps instead of 25 bps. While the mid-cap index was up 2.62%; the small cap index was up a modest 1.19%. The coming week could see traces of alpha hunting in mid-cap stocks, but even here the underlying theme appears to be defensives only.
• The big index to watch this week will be the banking and the auto index if the rate cut by the Fed is more than 25 bps. We already saw the Bank Nifty rally by 2.7% last week and this could get more pronounced in the coming week if the momentum is maintained. The same logic would also apply to the auto index which is again a rate sensitive and would gain from aggressive rate cuts. Markets will also be focused on the oil & gas index, which could see more pressure if Brent Crude struggles in this week too.
• The big data point this week will be the US Fed interest rate meeting. The FOMC will put out the Fed policy statement and it will be followed by the statement by the Fed chief, Jerome Powell. He will also be addressing the press after that. The Fed is expected to cut rates by 25 bps, but considering the jobs data and the sharp fall in consumer inflation, markets now believe that there may be a strong cast for the Fed to cut rates by a full 50 bps. The CME Fedwatch has also pegged that the Fed would cut rates by 75 bps to 100 bps by the end of 2024 and would go as far as 225-250 bps of rate cuts by the end of 2025. That would be huge and would largely reshape the market liquidity.
• There are some important data points in terms of India macros too. The WPI inflation and the India trade data are expected to be announced this week. The WPI inflation assumes significance as it is a good barometer of cost inflation triggered by corporates. In addition, the trade data would hold the key to the full year current account deficit, with concerns already building up that the actual CAD may be sharply higher than the previous year.
• The coming week will be almost like a truncated banking week with a clearing holiday and a virtual holiday on Idol Immersion day. The coming week will see the IPOs of Arkade Developers and Northern Arc Capital opening, while the IPO of Western Carriers will close for subscription. In addition, the IPOs of Bajaj Housing Finance, Tolin Tyres, Kross Ltd and PN Gadgil Jewellers will list in the coming week among mainboard IPOs.

PARTING THOUGHTS ON NIFTY AND SENSEX NEXT WEEK

For the coming week, there are 3 things to keep an eye on.

• Last week, VIX fell sharply to 12.4 levels. In the last few weeks, VIX has been very volatile and disruptive; but lower levels will create a buy-on-dips market.
• On the Nifty, the 25,000-26,500 range is likely to be a stiff resistance, although 25,000 will be the immediate support for the Nifty. A lot will depend on the Fed statement.
• Sensex has finally broken above the resistance of 82,000 levels and has settled above 83,000 levels. The range of 78,000-79,000 remains a key support level for the index.

The action now shifts to the US Fed statement and later to the CAD number to be announced by the RBI.