US Fed Meet to Weigh on Markets Next Week

The positive momentum in the Indian markets, as expected, continued during the week ended on Friday. Both the benchmarks –Nifty 50 and S&P BSE Sensex closed the week in green for the fourth week in a row. Nifty gained 0.83 per cent while Sensex added 0.72 per cent to close the week at 15,799.35 and 52,475 respectively. The broader market continued to outperform the benchmark indices. 

Going ahead, next week all the capital markets across the globe will be watchful of an important event in the form of the US Federal Reserve meeting scheduled on June 17. What stance the US Central Bank takes on the issue of stimulus and interest rates will decide the future course of action for the stock markets across the globe.

Next week’s US  Federal Open Market Committee (FOMC) meeting would keep the market volatile though there are already some indications of keeping interest rates to near-zero levels to aid the recovering economy. Any developments on the same would be keenly awaited. Nevertheless, at the current juncture, an increase in rates and tapering fears appear muted, with the US 10-year treasury yield already hovering near the bottom end of its recent range at 1.45 per cent. 

S&P 500 hit a record high this week, brushing off concerns over high inflation data. Nasdaq too moved upwards this week. The consumer price index in the US rose by 5 per cent in May 2021 at the fastest pace in nearly 13 years. Despite higher inflation, the US treasury yield has corrected sharply from 1.63 per cent last week to 1.45 per cent.

The European Central Bank’s (ECB’s) governing council maintained its high rate of bond purchases unchanged at its monetary policy meeting. The ECB revised eurozone GDP growth outlook upwards. The ECB increased inflation forecasts for 2021 and 2022. 

Taking a cue from a decline in Covid cases, stock markets in India remained resilient this week. India’s daily new covid cases came down below the 1 lakh mark during the week. South West monsoons arrived in India and are expected to cover the country in the coming weeks. 

Foreign Portfolio Investors (FPIs) have remained net buyers, month to date, to the tune of Rs 4769 crore underpinned by a steady decline in Covid-19 cases in India and decent GST collections in April. 

Shrikant Chouhan, Executive VP, Equity Technical Research at Kotak Securities said, “We expect FPI flows to India, in the medium term, to remain strong as India is at a cusp of growth revival path. Interestingly, low interest rates, a better export outlook, and a revival in the global economy are a good combination for India’s economic revival. Domestic demand revival will also be supported by the upcoming festival season.”

The market rally remained broad-based with healthy rallies witnessed in BSE midcap and BSE small-cap index. The BSE midcap index gained 1.8 per cent this week and the returns in the BSE small-cap index were much higher at 3.5 per cent. 

The majority of the sectoral indices moved in the positive direction. BSE IT, BSE Healthcare, BSE FMCG, and BSE Realty saw gains of 4.6 per cent, 3.7 per cent, 1.6 per cent and 1.5 per cent, respectively this week. 

Along with easing restrictions and declining covid cases, the statement released by the Department of Economic Affairs (DEA) stating that the economic impact of covid second wave will most likely be restricted to the first quarter of 2021-22 also helped in improving the domestic outlook.

Vinod Nair, Head of Research at Geojit Financial Services, “In the coming week, India’s inflation data for May, which is expected to be elevated, will be the key economic driver in the domestic market. On the global front, the Fed’s monetary policy meeting will be in focus as the market awaits its stance on continuing stimulus measures."

 However, the higher levels in the indices are not sustained.

There is a consistent supply in the form of profit booking, which does not allow Nifty to extend the gains but on the other hand, Nifty small-cap, Nifty midcap, and Nifty equity-weighted index have managed to outperform Nifty. 

According to Vishal Wagh, Research Head Bonanza Portfolio, this indicates that the rally is broad-based. “However, all underperforming stocks have begun to participate in the rally and that is the cause of concern. Money is flowing out of large caps to mid and small caps. The value of cheesing is witnessed in the market. Clearly, it shows the large-cap is overbought and correction is due in the market”, Wagh said. 

The Nifty index rallied more than 10 per cent from the recent correction low and hence a mild pullback cannot be ruled out.  

Given that the market is rallying on a slowed-down momentum, which can be properly visualised with the help of negative divergence in RSI on the daily timeframe, any sustained close below 15,400 should be treated as a red signal for the short term. “As long as the benchmark index is trading above 15400, we suggest traders maintain a bullish bias on the market,” said Nirali Shah, Head of Research, Samco Securities.

Another development that market men will have to keep an eye on is the firm trend witnessed in crude oil prices in the international market. On the one hand, legendary investors like Warren Buffet have recently trimmed his stake in US oil giant Chevron Corp, while on the other, traders have picked up call options tied to Brent and WTI crude oil prices reaching $100 by December 2022 on New York Mercantile Exchange. Surprisingly this is happening at a time when oil prices have already spiked nearly 41 per cent this year and it’s just over a year after the pandemic squashed fuel demand which led to the collapse of WTI below zero. 

“Surely, international traders are betting on higher volatility more than speculation on higher oil prices. With these signs of exuberance in the oil market, it would be wise to book profits in oil stocks,” said Shah. 

Back home, primary markets are gaining traction with two upcoming IPOs next week, while secondary markets are attentively focusing on the conclusion of the privatisation process by the government. It is advised that long-term investors should continue to follow their ‘buy at dip’ strategy with their investments in marquee names in a phased manner.