Dalal Street Week Ahead | Traders tread cautiously, keep fingers crossed over inflation number

India VIX, which measures the expected market volatility, fell significantly this week. If the volatility falls further and sustains, then there could be more stability in the market, which can give more comfort to bulls.

The market experienced mute trading in the week ended February 10 with the benchmark indices closing largely along the flatline. The Reserve Bank of India raised the repo rate by 25 bps to 6.5 percent, which was in line with expectations, and turned optimistic with increasing growth forecast for FY23 to 7 percent which lifted the market mood.

But the rising possibility of further policy tightening by the Federal Reserve, especially after the recent economic data along with FII outflow restricted gains.

The BSE Sensex fell 159 points to 60,683, and the Nifty50 gained 2.5 points at 17,856, while the broader markets performed far better than the benchmarks as the Nifty Midcap 100 and Smallcap 100 indices posted over 2 percent and 1 percent gains.

Auto, energy, FMCG, metal, and oil and gas stocks were under pressure, but buying was seen in technology, infra, pharma, and select banking and financial services stocks.

On Monday, the market will first react to monthly industrial output data that slowed down to 4.3 percent (from 7.3 percent in November 2022). Overall, the consolidation and rangebound trade, which we have seen for around one-and-half-month, is expected to continue in the coming week too. The focus will mainly be on monthly inflation numbers by India and the US both of which might give some direction to the market as the quarterly earnings season comes to an end, along with Adani Group stocks, experts said.

“Going ahead, markets await the release of key inflation numbers for a clear direction and to gauge the strength of the economy,” Vinod Nair, Head of Research at Geojit Financial Services said.

During such shaky times, investors need to adopt value buying as a strategy. Because of a decrease in valuation near the long-term averages, smallcap companies look appealing over the long term, he advised.

Let’s take a look at the 10 major factors that are likely to keep traders busy next week.

1) CPI Inflation

The monthly CPI inflation data, the most important factor to watch out for by the street next week, has been below the upper band of the RBI’s long-term target (4 percent and +/-2 percent) for the last two months and falling for the fourth straight month in December.

In first month of 2023, too, it is expected to be below 6 percent but the core inflation is likely to be sticky around 6 percent which was the main reason why the RBI’s Monetary Policy Committee has raised the repo rate by 25 bps with maintaining ‘withdrawal of accommodation’ stance.

“We expect CPI inflation to have remained steady in January, coming in at 5.8 percent YoY, up slightly from 5.72 percent in December. While core inflation remains sticky and food prices continue to fall, we expect the divergence between the two to narrow in January, with base effects acting on food, and core inflation moderating sequentially,” Rahul Bajoria, MD and Head of EM Asia (ex-China) Economics at Barclays, said.

Bajoria expects core inflation to have edged down to 6 percent YoY in January, after eight straight months of around 6.2-6.3 percent prints.

“Along with a higher base since last month, we expect some deceleration in core prices sequentially, as corporate profit margins moderate from historically high levels. However, we continue to expect reviving domestic demand and increasing pricing power to keep core inflation sticky for longer,” he said.

The WPI inflation print will be out on February 14, balance of trade data for January on the next day and, on Friday, foreign exchange reserves will be released.

2) US Inflation

Globally, US inflation, which is scheduled to be released on February 14, is going to be closely watched by investors as it is a key determinant for interest rate decision by the Federal Reserve in the coming month, and after the US dollar index has risen from 101.22 to 103.58 since the start of February amid fear that inflation may see a bit of uptick, given the strong jobs data. In the same period, US bond yields rose to 3.74 percent, from 3.42 percent.

For the time being, experts largely expect it to fall further in January 2023, from 6.5 percent in December.

Fed officials hinted at more policy tightening till they see a decisive sign of inflation falling going ahead.

3) Global Economic Data Points

Here are key global economic data points to watch out for next week:


4) Corporate Earnings

We are in the last leg of corporate earnings season and nearly 1,500 companies are going to release their quarterly numbers next week. Most of results will be announced in first two days of the week itself.

Important names to watch out for would be Nykaa, Adani Enterprises, Eicher Motors, Grasim Industries, ONGC, Siemens and Nestle India.

Further, Zee Entertainment Enterprises, Power Finance Corporation, Sun Pharma Advanced Research Company, Shree Renuka Sugars, SAIL, Wockhardt, Campus Activewear, Gujarat Gas, IRB Infrastructure Developers, Shalimar Paints, Apollo Hospitals Enterprises. Bata India, Bharat Forge, Biocon, Bosch, Indiabulls Housing Finance, Ipca Laboratories, Prestige Estates Projects, and SpiceJet will also release their quarterly numbers next week.

5) Oil Prices

The street will also focus on oil prices which have seen a strong rebound in the week gone by after Moscow has decided to cut oil output by 5 lakh barrels per day in March, especially after bans on Russian oil & products by Western nations amid ongoing Ukraine-Russia war. The decision was not made in consultation with the OPEC+ coalition, which Moscow co-chairs, CNBC reported.

International benchmark Brent crude futures jumped to $86.52 a barrel on Friday, up from tad below $80 a barrel last week, which is a significant jump in a week. But overall, the prices remained below $90 a barrel for more than two-and-half-month now, which experts feel is not a big worry for India, the net oil importer.

6) FII Flow

Finally, FIIs selling slowed down in February after significant outflow in January, which experts feel if continues further then there could be a great support to the market with the Nifty50 possibly moving towards higher trajectory instead of downward.

“After massive selling of equity worth Rs 53,887 crore in the cash market in January, FIIs slowed down their selling in February and turned buyers for Rs 1,458 crore on February 10. It appears that the FPI strategy of shorting India and going long in cheaper markets like China, Hong Kong and South Korea is grinding to an end,” V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said.

As per provisional numbers available with the NSE, FIIs have net sold more than Rs 5,000 crore worth shares in February so far, but DIIs have compensated the same by buying over Rs 6,000 crore worth shares in the same period.

7) Technical View

The Nifty has seen formation of Doji kind of pattern on the weekly as well as daily charts, indicating indecisiveness among buyers and sellers about future market trend. Overall, it traded within the range of Budget day for seventh consecutive session.

Considering the consolidation of last few days within the range of 17,650-17,900 along with strong defend at 17,800, there are higher chances that the rangebound trade may break on the higher side than downside, and also if Nifty50 manages to decisively break the downward sloping resistance trend line adjoining highs of December 1, 2022 and January 24, 2023, which to large extent also coincides with the high of Budget day (17,972) then there could be a rally towards 18,000-18,250 area in coming sessions, experts said. The first crucial support may be the low budget day (17,350).

“Nifty has been slowly inching higher but is yet to show good momentum. We need it to first give a break above Budget day high of 17,970 followed by psychological level of 18,000,” Ashish Kyal, Founder / CEO of Waves Strategy Advisors said.

He feels any close above 18,000 will be first sign that the uptrend is resuming again. “We need to also see participation from broader market which is lacking so far,” he said.

8) F&O Cues

Option data also indicated that 18,000 is expected to be crucial resistance for the Nifty50 in near term, with support at 17,700-17,800 area.

We have seen maximum Call open interest at 18,000 strike, followed by 18,500 and 18,200 strikes, with Call writing at 17,800 strike, then 18,000 & 18,200 strikes.

On the Put side, there was maximum open interest at 17,800 strike followed by 17,000 and 17,500 strikes, with writing at 17,800 strike, then 17,400 and 17,300 strikes.

“Considering the derivative data, FIIs’ short exposure in index futures still stands at 82 percent and the put/call ratio is sitting at the 1.02 level, therefore there is scope for a short-covering rally,” Santosh Meena, Head of Research at Swastika Investmart said.

9) India VIX

India VIX, which measures the expected market volatility, fell significantly during the week, especially after the end of key events (budget and FOMC meet last week). Hence if the volatility falls further and sustains then there could be more stability in the market, which can give more comfort for bulls, experts said.

The volatility dropped by 11.46 percent, from 14.40 level to 12.75 on week-on-week basis.

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