India Markets Weekahead: Volatile days ahead

September 18, 2016

(Any opinions expressed here are those of the author and not of Thomson Reuters)

A volatile trading week left investors confused on the direction of markets, and the Nifty ended almost 1 percent lower at 8,780. FIIs were net sellers to the tune of $106 million during the week.

Talk of a devaluation of the rupee in a bid to boost exports impacted banking stocks trying to recover after an earlier correction. The weakness in the Indian currency also weighed on markets on Thursday as clarifications from the government did little to pacify investors.

Brokers trade on their computer terminals at a stock brokerage firm in Mumbai May 13, 2014. REUTERS/Danish Siddiqui/Files

Brokers trade on their computer terminals at a stock brokerage firm in Mumbai May 13, 2014. REUTERS/Danish Siddiqui/Files

Advance tax figures for the July-September period showed a substantial increase in tax payments by the oil majors. On the economic front, India’s trade deficit declined sharply in August by 38.1 percent.

CPI inflation for August fell to a five-month low of 5.05 percent from 6.07 percent in July, mainly on account of a decline in food prices, especially vegetables. WPI inflation rose to a 24-month high of 3.74 percent in August against 3.55 percent a month ago. IIP contracted 2.4 percent in July (vs 4.3 percent a year ago), pulled down by a sharp decline in capital goods.

Meanwhile, the cabinet gave its nod for the creation of the GST council, which will make recommendations to the centre and states on important issues related to the landmark tax reform. However, we could witness market jitters when rates are announced.

Yes Bank lost further ground and fell by 8.5 percent during the week on reports that SEBI is looking at discrepancies into its withdrawn QIP issue and after a prominent brokerage reduced its target price on the stock to half, implying that the run-up in the stock was bloated and valuations were stretched.

On the global front, the Bank of England unanimously voted to leave interest rates unchanged at a record low of 0.25 percent and hinted at a rate cut as soon as November if the UK economy weakens. It also voted to keep its bond-buying programme target at 435 billion pounds and said it would continue with its plan to buy up 10 billion pounds worth of corporate bonds.

In the U.S., retailers’ sales fell in August for the first time in five months, while industrial production contracted in August to -0.4 percent after expanding in the previous two months.

Vegetable vendors wait for customers at a market in Mumbai, India, July 12, 2016. REUTERS/Shailesh Andrade/Files

Vegetable vendors wait for customers at a market in Mumbai, India, July 12, 2016. REUTERS/Shailesh Andrade/Files

The much-anticipated U.S. Fed rate announcement is due on Wednesday. Markets have gyrated back-and-forth in the past few weeks due to speculation over what the Fed would do. With deteriorating macro data, the central bank is unlikely to raise interest rates.

However, its commentary would provide direction to global markets. The Bank of Japan will also come out with its monetary policy statement the same day, with investors divided on what steps Japan’s central bank will take. Nevertheless, it is going to be a highly volatile and eventful week for global equity markets.

Back home, shares of rate-sensitive sectors such as automobiles and banks are likely to see action as the Reserve Bank of India’s monetary policy draws closer. Some market watchers expect the central bank to cut interest rates in October because of lower-than-estimated inflation in August and an almost normal monsoon. However, I strongly feel the new RBI governor will await further data points.

Markets have discounted most of the recent positive news and bulls are hoping that adverse news flows don’t affect market sentiment further. In such a scenario, I would continue to advise booking profits at every opportunity. An intermediate correction will also signify a ‘lower top’ (downtrend), which means investors may not have a very cheerful Diwali. We could witness a new high only next year, that too subject to data points exhibiting visible and sustainable improvements.

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