Firm Crude Prices May Stall Market's Northward Journey

The positive factor for the markets is a dramatic improvement in the vaccination rate lately. As a result, there is an increased probability of complete opening up of the economy heading into the festive season. However, late reports on Friday indicated that Maharashtra is planning to tighten movements to contain the spread of the Delta Plus variant of Covid-19. The state has registered the highest number of patients with this variant. The state government move aims to curb the spread of new variant and prepare its people for the third wave of Covid-19, which is expected in the next 4-6 weeks. 

However, another positive news for the economy is the progress of a normal monsoon as predicted by the Met department, which should greatly help rural India, where the impact of the second wave of Covid infection has been more than the first wave of 2020.

Hemant Kanawala, the head of equity at Kotak Mahindra Life Insurance, said: "Increase in vaccination rate, and normal monsoon should support strong economic growth in the second half of the financial year 2022. Nifty 50 is trading at more than 20 times one-year forward earnings, which is close to historical high and supported by low-interest rates in India and globally."

India VIX cooled down sharply by 11.5 per cent from 15.09 to 13.36 levels. Lower volatility indicates an overall bullish market bias and can help move Nifty above 16K levels.

Siddhartha Khemka, head of retail research at Motilal Oswal, said, "Earnings momentum is expected to accelerate in the financial year 2022, as the pace of vaccination has picked up and the economy opens up further. Good monsoon so far also supported bullish sentiments. Hence, the long-term trend of the equity market is likely to remain positive. Near term direction of the market would be determined by commodity price-led inflation and its impact on interest rates."

Foreign Portfolio Investors (FPIs) bullishness on India has pushed Nifty50's P/E at 30.6x, helping Indian markets trade at a 25 per cent premium to its five-year average by outpacing other emerging markets (EMs) peers as MSCI Emerging Index TTM P/E trades at 16.8x.

FPIs have been net buyers in Indian equities to the tune of Rs.3,842 crore in June 2021 till date as they turned optimistic on a steady increase in business activities after various states continued to relax restrictions. An increase in the pace of vaccination in the past week also helped improve investor sentiment.

During the week, oil futures managed to deliver their fifth consecutive rising streak, climbing nearly 13.5 per cent over a month. Brent crude crossed the $76 mark this week, the highest since late 2018. This rise is based on certain important developments. First, global oil demand is expected to attain pre-Covid levels by the third quarter of FY22 as economies open up driven by an uptick in mobility in the US and Europe. However, certain factors can be a cause of concern for the market going ahead.

Post the US Fed-meet on June 16, the dollar saw some weakness which enticed commodity prices, especially crude. Additionally, lack of investment by global oil majors in new capacity due to reforms around ESG may cause a supply shortage, bringing about further optimism in crude prices.

Explaining the impact of firm trend in crude on the Indian economy and the markets, Vishal Wagh, head of research at Bonanza Portfolio, said, "As importing nation India will get impacted adversely. The pace of economic growth may get slower due to rising inflation, cost of production. The sector like paints, chemicals, auto, tyre, lubricant and transport, and especially airlines, may take a hit."

He also said that high crude prices will impact domestic currency also. As a result of Crude prices firming up in the international markets, the Indian currency, Indian Rupee, managed to hold levels of 74.40 and though the risk of further depreciation is still there. If it sustains and continues to hold above 73.60, it will likely retest the 75-76 zone in the coming few weeks. There is a triangle breakout that has due checked in through the back. So, the rupee is ready for sharp appreciation of 2-3 per cent vis-a-vis the dollar.

In fact, the firming up of crude prices have begun to show its impact on the emerging markets. The central bank of Mexico unexpectedly raised policy rates to 4.25 per cent on Thursday. The decision followed accelerating bi-weekly headline and core inflation during the first fortnight of June of 6.02 per cent and 4.58 per cent, respectively.

Federal Reserve Chairman Jerome Powell agreed that some inflation pressures are stronger and more persistent than he had anticipated, though still not on par with some of the worst episodes the US has seen historically.

Kanawala said US Fed has started discussing the path for reducing liquidity support, which it has been providing for the last year to stimulate growth. When they announce their roadmap, it can bring volatility in risk assets, including emerging markets and India.

However, based on Friday's market, Khemka remained bullish on equities as global cues have turned positive after US President embraced a bipartisan Senate infrastructure deal. The US jobless data also showed improvement.

S&P 500 and Nasdaq hit an all-time high last week, brushing aside concerns over high inflation. US 10-year treasury yields ranged between 1.45-1.50 per cent this week. Bank of England kept its monetary policy unchanged but vowed to monitor rising inflation. "Investors will be watching for the release of core personal consumption expenditures index, a key inflation indicator," he said.

The Nifty 50 Index has been trading sideways for almost three weeks now. It seems to be facing a temporary halt after a period of outperformance. Overall market sentiments in global indices look positive, and eventually, Nifty is also likely to catch up.

Nirali Shah, head of research at Samco Securities, said, "After a strong bounce back from 15,450, this zone is now being established as crucial short-term support. Traders should maintain a bullish bias on the market and remain watchful for any break of the crucial support, as this would lead to weakness in the short term."

In the coming week, domestic indices are expected to mirror global equities. June auto sales numbers would give investors a fair idea of the revival of ground-level sentiment.

Investors can closely watch the unlock theme stocks as they could see knee jerk reactions depending on the development in the delta variant, she added.

The firm trend seen in the broader market continued last week too. Both Nifty midcaps and Nifty small-cap indices continued to outperform the major indices, the direction we have been witnessing since April 2020. BSE Midcap and BSE Smallcap index moved up from correction seen in the latter part of last week. BSE Midcap and BSE small-cap gained 1.4 per cent and 1.5 per cent, respectively, in the week.

"This indicates that the rally is broad-based, and the value gaps between mid-caps or small-caps and large-cap are more or less got filled, and the market is now ready for healthy correction on a broader base. As far as, both indices show tiredness on the charts," Wagh said.

The surge in crude oil price could increase India's expenses, thus affecting the fiscal deficit. Indian Stock market may underperform compared to global peers. Midcap & Small-cap Indices may see a worse scenario.

Shrikant Chouhan, Executive VP, Equity Technical Research at Kotak Securities, said, "In the coming weeks, the markets will keep an eye on crude oil prices, inflation numbers and on any actions from Central Banks globally."