Markets negative amidst high volatility

Indian equity markets turned negative this week amidst high volatility.

Nifty closed below the psychological level of 12,000, after RBI in a surprise move, kept the key policy rates unchanged.

Market sentiments turned negative as investors got worried over the prolonged slowdown in the economy.

Further KM Birla’s warning that Vodafone Idea would shut down without government’s relief further dampened sentiments. Banking stocks declined sharply on the concern of rising G-Sec Yield which spiked 15bps in the last two trading sessions to 1-month high of 6.66%. Globally also with the US imposing tariffs on Argentina and Brazil and providing support to Hong Kong raised concerns over the US-China trade deal.

Nifty 50 closed lower at 11,922 with a loss of 1.1%, while Sensex closed at 40,445 (-0.9%) for the week.

There was broad-based selling across the market with Nifty Midcap 100/Nifty Smallcap 100 closing in red with losses of 2.8%/2.0%.

All the sectors closed in red except IT, which gained 1.9% and Realty which was up 0.5% for the week. PSU Banks led the fall with a loss of 7.8% followed by Auto (-3.5%) and Metals (-3.4%). Media, Pharma, Infra and Energy were down in the range of 2.6%-2.8% while others were down in the range of 1.2%-1.9%.

FIIs were net sellers worth more than Rs 3,850 crores. On the other hand, DIIs turned net buyers of around Rs 2,422 crores.

RBI’s status quo confirms that it is prioritizing rising inflation over grim economic growth. We expect the inflation to remain close to or above 5% by March 2020, which means that a rate cut in the next MPC in February 2020 is highly unlikely. Further, we continue to maintain that there will be no more rate cuts unless inflation falls back towards 4%.

Thus there is a good probability of a prolonged pause over the next 3-4 quarters.

The market is likely to remain range-bound in the absence of any major trigger in the near future.

Key events to watch out for in the next week would be the US Fed and ECB meeting. The market would also watch out for Oct IIP and Nov CPI data along with development on the US-China trade deal and Brexit as the UK goes into the election on Dec 12.

Technically, Nifty breached its crucial support of 11950 and formed a Bearish Engulfing pattern on the weekly scale. A sustainable move below 11888 may lead to a correction towards 11800 and then 11700. On the flipside, the immediate hurdle is placed at 12050-12100 levels.