A truncated week in India witnessed panic selling triggered by a flurry of negative news, turning market sentiment cautious. The Nifty fell 1.3 percent during the week where mid-cap and small-cap indexes continued to outperform their larger peers.
Markets turned jittery after a report on Thursday said a special investigation team has asked for details of investments through Participatory Notes (P-notes), raising concerns that investments through the medium may slow down. According to SEBI data, foreign portfolio investors have invested 2.16 trillion rupees in Indian securities through P-notes as on August 2016. Of this, investments in equities stood at 1.32 trillion rupees. Disappointing IIP data for August added to the negativity.
Geopolitical tensions rose after the U.S. military launched cruise missile strikes on areas in Yemen controlled by Houthi forces in retaliation for failed missile attacks on a U.S. Navy destroyer. On the same day, China reported weak trade data for September as its exports sank 10 percent to $184.5 billion, while imports fell 1.9 percent to $142.5 billion. Benchmark indexes fell that day with weakness prominent in the bond market. Despite FII selling in Indian equity markets, the rupee showed high resilience against the dollar.
The information technology pack remained in focus as Q2 FY17 earnings of sector majors Infosys and TCS unnerved investors because of the likely challenges that could restrain earnings growth. Hindustan Unilever corrected after its parent Unilever Plc warned that sales in India in July-September may be hit due to higher input costs.
In a push on infrastructure, reports said the government may seek parliamentary approval to spend about $7.5 billion more on roads, railways and other public programme over the next five months. This means the government has already exhausted around 73.7 percent of the annual fiscal deficit budget targets in the first four months of the fiscal year. Going by the current scenario, the government's fiscal deficit target will be hard to maintain.
On the economic data front, IIP declined 0.7 percent in August compared with a revised 2.5 percent decline in July. The silver lining was CPI inflation dipping to a 13-month low of 4.31 percent in September as against 5.05 percent in August. WPI stood at 3.57 percent compared to 3.74 percent in August, raising hopes of further monetary easing by the RBI.
China PPI for September grew by 0.1 percent (vs expectations of -0.3 percent), the first positive reading in almost 5 years. Minutes from September’s FOMC meeting showed that the U.S. Fed still has some concerns about job growth and inflation. However, it could be getting much closer to raising rates, especially with several key Fed members stating that further delays in raising rates could be risky and potentially push the U.S. economy into recession.
In the coming week, Indian markets are seen consolidating with investors remaining cautious as corporate results for September quarter are released. Index majors Reliance Industries, YES Bank, HCL Technologies, Wipro and UltraTech Cement will report their earnings, as will ACC, Hindustan Zinc and Cairn India.
Investors will also take note of trade data released on Friday. Exports rose 4.6 percent to $22.88 billion in September, only the second increase in nearly two years. This suggests international demand for Indian goods may be rising. Imports declined 2.5 percent to $31.22 billion, helping narrow the trade deficit to $8.34 billion from $10.17 billion a year earlier.
On the global front, the United States’ Industrial Production data for September will be declared on Monday. On Wednesday, China will report Q3 GDP data (its economy advanced an annual 6.7 percent in the second quarter). On Thursday, ECB will hold its long awaited October policy meeting to review interest rates and stimulus programmes.
Meanwhile, the third and last U.S. presidential debate between Democrat Hillary Clinton and Republican Donald Trump will take place at the University of Nevada in Las Vegas on Wednesday. Global markets will witness volatility in the run-up to Election Day on November 8.
Coming back to domestic markets, sentiment will be dictated by multiple factors like the upcoming U.S. presidential election, the U.S. Fed’s rate direction, Brexit, the Syrian conflict and tension between India and Pakistan.
The Nifty has managed to close above the major support level of 8,550, but it is now at a critical juncture. Any setback for markets globally or back home could push the index to 8,200-8,250 levels in a short span of time. Unless we see a consolidation at current levels or a correction, it would be prudent to stay on the sidelines.
Ambareesh Baliga has about 25 years of experience in the stock market and has worked with Karvy and Kotak groups in the past. He is a regular market commentator on various business channels. He is a commerce graduate from Calcutta University and a qualified cost accountant.