Markets await signal from US-China deal

Indian equity markets, though lacklustre in the early part of the week given year-end holidays gained momentum in the middle post couple of encouraging developments both globally and domestically. However, it shredded off all the gains on the last day due to escalating geopolitical tensions in the Middle East.

Market sentiments had got boosted after US President said that the two countries – US and China would be signing phase one of the trade treaty on 15th January. Further, China’s central bank has cut the amount of cash that all banks must hold as reserves, releasing around 800 billion yuan ($114.91 billion) in funds to shore up the slowing economy. Domestically, the government announced the roadmap for spending more than Rs 100 lakh crore for building infrastructure over the next five years. However, markets turned a little cautious after US airstrikes killed a top Iranian commander, intensifying geopolitical tensions in the Middle East. This led to sharp jump in Brent crude futures which surged to their highest since September 2017 to $68.16/barrel, reflecting concerns that escalating Middle East tensions may disrupt oil supplies. The rupee also fell sharply to 71.77 against the US dollar.

Nifty 50 and Sensex closed down marginally by 0.2%/0.3% to close at 12,227/41,465 for the week. However, broader markets outperformed the benchmarks with Nifty Midcap100 up 1.7% for the week while Nifty Smallcap100 was up 3.5%. Sectorally it was a mixed bag with Metals (+3.2%) being the top gainer, followed by IT, Pharma, Realty, Infra and Energy, all closing in the range of 0.5%-1.2%. Media was the biggest loser with 3% loss, while Auto, Banks and FMCG were top losers in the range of 0.1%-1.1%.

FIIs turned net sellers this week, having sold equities worth more than Rs 765 crores till Thursday while DIIs turned net buyers, buying equities worth more than Rs 1055 crores.

The overall market sentiments have been revived by the government’s more than doubled infrastructure capex plan for the next 5 years along with the announcement of the US-China deal signing date and Beijing easing monetary policy to support slowing growth. Further with India’s Manufacturing PMI data coming at 7-month high, GST collection continuing above Rs 1 lakh crore for the second month in a row and expectations rising from the Budget, broader markets have started participating in the rally. However, the emergence of geopolitical tensions led to some profit booking. In the near term, markets could be volatile going ahead due to the risk of possible retaliation from Iran. However, on the positive side, markets would be looking ahead for the signing of phase 1 of the US-China trade deal along with the December quarterly results and developments prior to the Union Budget which might keep the momentum intact.

Technically, Nifty has been consolidating in between 12118 to 12293 zones from the last twelve trading sessions and now a decisive range breakout with follow up action could drive the fresh leg of the rally. At the current juncture, Nifty is hovering around its strong support of 12150 - 12200 zones and now it has to continue to hold above this zone to witness an up move towards 12300 - 12350 levels.

(The writer is Head – Retail Research, Motilal Oswal Financial Services Ltd)