Global markets awaiting US GDP growth numbers for Q1

Buoyed by the US Fed rate cut (the first reduction in interest rates since March 2020), renewed FII purchases, stable macroeconomic data and expectations over Q2 results; the domestic stock markets witnessed a stunner rally during the week ended September 20, 2024.

Benchmark indices closed at new highs. NSE Nifty climbed 1.71 percent to finish at 25,791, and BSE Sensex rallied two per cent to 84,544 points. Broader markets witnessed underperformance with the Nifty Midcap-100 up by just 0.3 percent and the Smallcap-100 index fell 0.9 percent. FIIs have net bought Rs11,518 crore worth of shares in the cash segment during the week gone by, but DIIs preferred profit booking in the week, selling shares worth Rs634 crore. However, it is important to remember that in the year so far, FIIs have net sold shares worth Rs1.2 lakh crore, while DIIs have bought 3.28 lakh crore shares. Last week witnessed sectorial rotation among investors to Largecaps, especially in consumption, staples, auto, finance, and realty. Rate sensitive sectors were in limelight. In the short term, investors are being cautious on export-oriented sectors like pharma and IT due to depreciation in the dollar. The current international crude oil prices are supportive for the oil importers like India; but there is need to watch developments in Middle East for possible sudden spike in oil prices. Advance tax numbers have been better than targeted numbers reflecting robust health of economy.

In the near-term market direction will be dictated by FII flows, domestic macroeconomic data, F&O settlement, Q2 earnings season, outcome of Assembly elections in some States and global cues. Globally all investors will focus on the US GDP growth numbers for the second quarter ended June 2024, followed by the Federal Reserve Chair Jerome Powell’s Speech on September 26. According to experts, the economic data pointed to a soft landing of the US economy at the start of the rate cut cycle and the series of rate cuts may be seen in the coming policy meetings.

Irrational Exuberance or Rational Bull Market: It is important to understand that the present ongoing global rally has been led by the mother market — the US from the front. The humongous liquidity created by the leading central banks after Covid times particularly the US Fed, played a major role in fuelling and sustaining the rally. It is important to appreciate a unique feature of the Indian market in the present bull run. The rally is primarily driven by domestic investors whose numbers have been growing every day. Explosive growth in demat accounts and AUM of the mutual funds are clear indicators. SIPs have crossed Rs23,000 crore per month. Domestic money has completely eclipsed foreign money in this bull run, and sustained selling by FIIs didn’t have any impact on the market. The market’s anticipation of a quick economic and earnings recovery in India has proved right. The Midcap and Smallcaps have outperformed the Largecaps, and many new-age digital companies and sunrise sectors like renewables have become darlings of investors. Valuations are elevated andirrational exuberance in the SME and IPO segments is a cause for concern. Optimism is sustaining the rally.

The growth momentum in the economy is strong, corporates are deleveraged, credit growth is good, the asset quality of the banking system is healthy, inflation is under control, the current account deficit is low, and the government has been consistently delivering on fiscal consolidation. In brief, it’s a Goldilocks macro scenario supporting the bull run.

However, it must be remembered that the bull markets, like everything else, aren’t permanent. Typically, markets display a boom-and-bust characteristic and nobody knows how long this bull phase will last. While it may last longer than most market participants think, perhaps it’s time to be cautious. It makes sense to remain invested as experience tells us that wealth is created by staying put through periods of outperformance and underperformance.

Follow market trends and history. Don’t speculate that this particular time will be any different. The birth, growth, maturity, and eventual demise of bull markets has been true of most bull runs.

F&O/ SECTOR WATCH

Despite benchmark indices trading at new highs with moderate weakness in broader market; exuberant buying over weekend gave fillip to strong volumes in the derivative segment. Post US Fed rate cut of 50bps; the Indian market rallied in concert with other global markets. Bank Nifty outperformed the Nifty on the weekly charts. Bank Nifty climbed over 3.5 per cent, while Nifty gained more than 1.5 per cent. In the options segment, on the Call side, the maximum Open Interest was seen at the 26,000 strike, followed by the 26,500 and 25,800 strikes, with maximum writing at the 25,700 strike, and then the 26,200, 26,600 and 26,100 strikes. On the Put front, the 25,000 strike holds the maximum Open Interest, followed by the 25,500 and 24,500 strikes, with maximum writing at the 25,700 strike, followed by the 25,600 and 25,500 strikes. For the Bank Nifty, highest Call Open Interest is at 54,000 strike whereas for Put highest Open Interest is at the 53,000 strike. Implied Volatility (IV) for Nifty’s Call options settled at 11.47 per cent, while Put options conclude at 12.35 per cent. The India VIX, a key market volatility indicator, closed the week at 12.47 per cent. The Put-Call Ratio of Open Interest (PCR OI) stood at 1.14 for the week. Considering the positive momentum, observers see the Nifty moving beyond the psychological 26,000 mark in the coming week, with immediate support at 25,500 followed by 25,300 being a key support. Punters advise tracking rollover volumes in the settlement week with an eye on Q2 results expectations. Expect heightened volatility in the week ahead. Stock futures looking good are Escorts, HUL, Kotak Bank, L&T, M&M and UBL. Stock futures looking weak are Apollo Tyres, Ashok Leyland, Mphasis, Glenmark, Grasim and SBI.

(The author is a senior maket analyst and former vice- chairman, Andhra Pradesh State Planning Board)