Market outlook for this week (April 15-April 19)

15 Apr 2024 , 09:44 AM

ISRAEL IRAN WAR HAS SOME CLEAR DOWNSIDE RISKS

The old wisdom goes that, “Kingdoms are liberated by wars, but empires are built only by peace.” In that light, the Iran-Israel conflict that has just started in the Asian region is likely to be another meaningless attempt to find a solution to a historic problem with guns and cannons. However, business analysts are not known to worry about political niceties. The obvious impact of this conflict will be on the oil prices. The Middle East continues to be one of the biggest suppliers of oil to the global market.

Unlike the US, which consumes most of the oil it churns out, countries like Saudi Arabia, Iraq, Iran, and UAE are predominantly exporters and hence have a huge swing impact on global oil prices. The immediately impact will be the spreading of the conflict to the Arab Peninsula and to the Strait of Hormuz, a key conduit for the Asian oil and gas trade. Also, the Red Sea will continue to be point of conflict, forcing ships through the circuitous Horn of Africa route. That would obviously mean higher freight rates and higher insurance costs.

GEOPOLITICAL STRIFE ALSO OPENS NEW PARADIGMS

There is also a counter argument to this. While there is no doubting the inflationary impact of higher oil prices, this is also likely to heighten security concerns in the entire Asian region. For countries across Asia, and especially for India, this means higher investment in defence preparedness. For a country like India, that has been investing heavily in making its own defence industry competitive in the last few years, this would offer an opportunity to expand its defence export franchise in the entire Asian region.

It is also an opportunity to showcase, India’s best in case defence companies on a global scale. Now defence spending is not going to be a choice, but a matter of necessity and countries would be increasingly sceptical about leaving their security to the peace traders. That means, this period of strife and the resultant geopolitical risks could be a golden period for defence demand. Indian defence companies have done extremely well in the last 1 year, but this could just be the proverbial tip of the iceberg. So, there are two sides to the story, anyways; and there is certainly a new paradigm in defence demand.

WHY IS GOLD RALLYING SO HARD?

Most investors and analysts have been confounded by the rally in gold. This week, gold got tantalizingly close to the $2,400/oz mark, although it corrected towards the end of the week. The classical argument against the gold rally is that; gold typically benefits amidst falling interest rates, as it reduces the opportunity cost of holding gold. However, when a defensive asset becomes an alpha generating asset class, then opportunity cost really does not matter. The fact is that people now sincerely believe that even if there is ambiguity on rates, gold prices would still rally. The reason for that is quite simple.

The geopolitical unrest is not going away in a hurry and such periods are ripe for gold to really. Secondly, there has been a surge in central bank gold buying, with the leading central banks of the world buying nearly one-third of their gold reserves only in the last 2 years. That has been silent factor boosting the price of gold. Goldman Sachs, in  its latest estimate has pegged gold prices this year to scale up to $2,700/oz, a full 12.5% upside from current levels. Gold and equities have rarely rallied in tandem, so that remains a question mark.

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

For the latest week to April 12, 2024, the markets were high on domestic and global data flows. Here are 7 key data points that influenced stock market direction this week.

• FPI flows in the week were robust at $1.46 Billion. This is despite the fact that during the week there was 1 trading holiday and 1 clearing holiday. That means, there were just 3 days of FPI data reporting. FPIs were decisive buyers on all the 3 days, although the coming could see some FPI selling in the aftermath of the quarterly results season.
• India consumer inflation was announced this week, and it came in 24 bps lower at 4.85%. That was nearly 5 bps lower than the consensus estimate. The fall in CPI inflation was triggered by marginal fall in food inflation and core inflation, but a sharp fall in fuel inflation. The latter was more due to the petrol and diesel cuts ahead of elections.
• Another important data for the week was the IIP data announced by MOSPI indicating the growth in industrial production for February 2024. IIP growth stood at 5.67% in the latest month, which is sharply better than December and January. There was positive traction across mining, manufacturing, and electricity components of the IIP basket.
• Tensions in the Middle East and West Asia continued to simmer as Iran undertook retaliatory attacks on Israel. It is yet to be called a full-fledged war, but it was nothing short of that. These tensions could have serious repercussions for oil prices. It not only makes the Red Sea route fully unviable, but also is now likely to spread to the Arab Peninsula and to the Straits of Hormuz. The theatre of war is broadening.
• The Bureau of Labour Statistics in the United States announced the CPI inflation for March 2024 at 3.5%. That showed a sharp 30 bps spike over the February 2024 reading and a 40 bps spike over the January 2024 reading. Now, the rate of inflation is a good 150 bps away from the target inflation rate of 2%. The higher US consumer inflation was despite food and core inflation staying flat as the inflation spike was explained by the spike in gasoline prices; largely due to the rising geopolitical risks globally.
• The quarterly results season has just begun. TCS was the first big company off the block, announcing its Q4 results and the full year results for FY24. Broadly, the results were stellar with net profits growing by 9% and revenues growing by 3%. While the sales numbers were slightly below estimates in constant currency terms, the profits were above estimates. The order book looks robust and that is a good sign for other large IT company results in India. With Infosys and Wipro announcing their results this week, the IT picture would be a lot clearer.
• On Wednesday, the US Federal Reserve also published the minutes of the FOMC meeting held in March. Of course, the minutes continued to remain ambiguous about rate cuts and the time table of rate cuts. The statement only hinted at a broad Fed intent to cut rates. In response, the bond yields in the US spiked during the week while the dollar index also surged to above 106 levels during the week. That led to a late sell-off in the markets. However, this was a truncated week, with 4 days of trading and 3 days of banking services. Among other things, the rather cautious and hawkish statement by Neil Kashkari of the Federal Reserve also pulled up the rates. Kashkari, a known dove, had hinted that there may not be any rate cuts in 2024.

The reality is that behind the short term value of such news flows, the long term story of the India growth narrative and the revival in the investment cycle are still real. Indian companies are enjoying one of their lowest leverage ratios at 0.57 while capacity utilization is at 75%. If Indian business has to grow, it calls for billions of dollars in investment to expand capacity. That is likely to trigger  off a virtuous cycle of capital investments, growth, and consumer spending. That remains the longer-term fundamental story of the Indian economy.

STOCK MARKET TRIGGERS FOR COMING WEEK TO APRIL 19, 2024

It was a week in which the Nifty and Sensex closed absolutely flat as the sell-off on Friday neutralized all the gains of the week. The coming week is not too big on data flows, but trade data, WPI inflation and the RBI MPC minutes could set the tone for the coming week. Here are some major triggers we see in the coming week to April 19, 2024.

• It was a flat closing for the Nifty and Sensex, hardly moving from their previous week’s close as the Friday selling neutralized the weekly gains. However, The Nifty Next 50 gained 0.59% during the week. Among the smaller indices, the mid-cap index gained 0.09% while the small cap index closed 0.86% higher. The temporary fear about smaller stocks is gone and that is good news for retail investors who still rely on small caps.
• Results season started last week with the TCS results numbers announced on Friday. The coming week will some key large cap Q4 results to be declared. This includes companies like Infosys, HDFC Bank, Bajaj Auto, HDFC Life, HDFC AMC, and Wipro. In addition, the week will also see Q4 results of smaller companies like Jio Finance, Angel, I-Sec, ICICI Lombard, GIC, CRISIL, TCOM, Persistent Systems.
• The first phase of general elections will take off starting April 19, 2024. In this phase, a total of 102 constituencies across 21 states will go to the polls in the first round. While it promises to be a pitched battle this year, it looks like the market is already expecting stable governance and reformist approach to continue.
• The coming week will see the minutes of the RBI Monetary Policy Committee (MPC) being announced. In the April policy, the RBI has held status quo on rates. However, there are hopes that the RBI may surprise the street with an early rate cut. Also, even as the RBI has held on to rates, the market is expecting greater clarity on growth and inflation in the coming quarters.
• The all-important merchandise and services trade data for March 2024 and FY24 will be released this week. Of course, the markets will be keen that the services surplus nearly wipes out the merchandise trade deficit to keep CAD in check. This trade will have to viewed in the context of oil prices and the strife between Israel and Iran.
• The big story of the last week was the dollar index (DXY) rallying to above 106 levels, putting pressure on the Indian rupee and also on FPI numbers. The sharp rally in the dollar index last week could impact the rupee, as the rupee has been persistently over 83/$ in the last 4 weeks.
• On the Global rates trajectory, the markets will be keenly watching the Fed speak by Powell, Bowman and Mester. For now, the broad thrust appears to be that rate cuts in the US may not commence till September, especially after the recent inflation data. The Fed voicers are likely to be on the hawkish side only.
• There are no fresh IPOs this week on the mainboard as IPOs are likely to stay out with the ₹18,000 Crore FPO of Vodafone Idea opening next week. This is a desperate moment for Vodafone Idea as it needs these funds desperately to survive through the next few months and live to fight another day.
• Finally, we come to the major data points from US markets to be keenly watched this week. The variables include Retail sales, business inventories, capacity utilization, API stocks, jobless claims, housing starts, IIP. In rest of the work markets, the data flows will include IIP, trade, and inflation (EU; machinery orders, trade, and inflation (Japan); Q1 GDP, and jobs (China); and UK jobs, inflation, and PPI.

The coming week data flows will depend on the trade data and the RBI MPC minutes. However, the global cues like the geopolitical situation in the Middle East and the dollar index will have a material impact.

NIFTY AND SENSEX NEARING UPPER END PREDICTIONS

During the week, both the Nifty and Sensex got very close to our projected range, with both indices correcting on Friday. This week, the Nifty supports at 22,300 levels and Sensex supports at 74,000 will hold the key. ON the upside, the resistance at 22,800 for Nifty and 75,500 for Sensex will hold the key. Market is in new plane and hence levels may not be too easy. However, sharp falls are unlikely with Nifty VIX at 11.49, despite this being an election year. That will keep the market in buy-on-dips zone. Dollar index will hold the key to the coming week also.