Weak Global Markets, Lockdowns & Q4 Results to Impact Domestic Marts Next Week

The weakness in Indian benchmarks last week is expected to continue in the new week beginning Monday. Indian markets will continue to follow global cues, though domestic factors like staggered state-level Covid restrictions and expected fourth quarter results could limit the weakness.

During the truncated trading week that ended last Friday, the benchmarks lost its two-day winning streak and closed with a loss of around one per cent. Nifty closed at 14,678 while Sensex ended at 48,733. Broader markets continued to outperform as the midcap index restricted losses to 0.7 per cent, whereas the smallcap index ended with 0.3 per cent gains.

Domestic markets continued to follow global cues throughout last week. Due to a steep rise in prices of commodities — both soft and hard — the threat of inflation looms over all global economies. The annual CPI inflation in the US surged to 4.2%, the most since 2008. Tech stocks have taken a beating this week with the Nasdaq Composite Index down 4.6% in the first four days of the week.

Asian markets too corrected sharply this week after the crash in Taiwan, where the Taiex Index corrected by 8.4% this week. Fresh Covid concerns and unwinding of leverage trades led to a sharp fall in Taiwan’s market. Singapore and Japan’s markets are down by 4.6% and 4.3%, respectively, this week, as they too are seeing a resurgence in Covid cases. Overall, the MSCI Emerging Markets Index has lost around 4 per cent this week.

Rusmik Oza, Executive VP, Head of Fundamental Research at Kotak Securities, said, “The global correction and potential impact of commodity prices on this quarter’s earnings can lead to some kind of correction in Indian markets in the very near future.”

Ruminating on inflation, one of the major factors contributing to market rise is metal prices, which have continued to climb past their multi-year resistance levels. Metals, especially steel, is rising since the last year, when the pandemic crippled economies. The Nifty metal index managed to deliver over 250% gains since March-lows last year, outperforming leading sectors. Global demand too continues to remain resilient, even though production has still not caught up.

In addition, China, which has a majority share in the global metals trade, has been focusing on decreasing their production activities in-line with their carbon neutrality goals by 2060. With these production cuts in steel, copper etc., supply-side constraints will exaggerate further, pushing prices higher.

Therefore, the rise in commodity prices will continue to play an influential role on inflationary tendencies going ahead, but the real question is how long will the rally continue? Given the multiple tailwinds of resilient demand and production cuts along with price-to-book (P/B) ratio of a couple of steel stocks that had been historically trading over 2.3x at the top of their cycles, are currently still trading around 1.8x.

However, after seeing unprecedented up move since the start of the year, the BSE metal index fell by 4 per cent last week.

Nirali Shah, head (equity research) at Samco Securities, said, “Keeping these things in mind, our best-case scenario is that with short term corrections, the momentum in metal stocks will continue for some more time, and traders can enter on dips and exit at appropriate resistance levels.

However, fresh investments should be avoided as it can turn out to be risky for long term investors from here on. Despite super normal profits, stock prices are refusing to go up, she added.

Besides, corporate earnings have remained in consensus with market expectations that is restricting a major downfall in the market. The management commentary is also cautiously optimistic. Though Foreign Portfolio Investors (FPIs) have turned net sellers in the Indian market, the solace is that Domestic Institutional Investors (DIIs) have turned net buyers for the second month in row in April 2021.

Corporate earnings season for the fourth quarter of financial year 2020-21 is underway. So far, earnings reported have largely been in line with consensus expectation. Earnings have been led by strong performance in the banking and commodities sectors. Management commentary for the month of April is positive but companies are facing demand and supply challenges on account of localised lockdowns. Hence, the impact of the lockdowns would be felt in the first quarter of financial year 2022.

Shibani Kurian, Senior EVP and head (equity research) at Kotak Mahindra AMC, said, “Going forward, markets will likely track the pace of vaccinations, trajectory of the active-cases curve and management commentary of companies. Roll-back of localised lockdown and trend of inflation in many global commodities like crude and steel will be other key factors to watch out for, by investors.”

Though Indian indices have shown sturdiness despite increasing Covid cases, sustainability at higher levels seems difficult if the situation aggravates on interest rates and inflation in developed markets. It may continue to trickle down to India and keep our bourses under pressure. Stock specific volatility due to quarterly earnings cannot be ruled out as well.

Investors are advised to keep the company’s future guidance in mind before investing in stocks, shah said.

Technically, on daily charts, the market has formed a “lower top” kind of formation, but at the same time, Nifty is hovering near 20- and 50-day simple moving average with modest volume activity.

Shrikant Chouhan, Executive VP (equity technical research) at Kotak Securities, said, “We are of the view that the broader texture of the market is still bullish, but due to weak global market conditions, Nifty/Sensex may respectively consolidate in the range of 14,500-14,800 or 48,200-49,200 in the near future.

For Nifty/Sensex, the strong support levels for traders exist at 14,590/48,470. Below this, correction wave is likely to continue up to 14,500/48,200. Further downslide may also continue, which could drag in indices up to 14,390/47,800. On the flip side, 14,800/49,200 should be the sacrosanct level for bulls, above which, uptrend wave is likely to continue till 14,950-15,100 (for Nifty) or 49,750-50,100 (for Sensex), Chouhan said.

Vishal Wagh, research head at Bonanza Portfolio, also believes Nifty may continue to see lower levels in the coming week. Support will be seen near 14,450 and if it gets broken, it may retest the recent low of 14,151. On the higher side, 14,950 may work as resistance.

The Wholesale Price Index (WPI) showing inflation is the major economic data point due for release in the coming week, and should have a meaningful effect on the market.

On the earnings front, Bharti Airtel, Tata Motors, IOC, Havells, Hindalco and Federal Bank are some of the prominent names who will be announcing their results during the coming week.