Escalating global tensions, cloud over banks to keep market weak!

The domestic equity market witnessed seesaw movements during the week gone by and closed in the red on fears of global tensions and lack of short-term stimulating measures from the government. DIIs have started pressing the ‘sell’ button on the back of domestic redemption pressures and have sold stocks to the tune of Rs 7,965.50 crore in April alone, highest since March 2016.

This is expected to further accelerate in the times to come, as domestic investors may require liquidity to restart their normal life/operations once the lockdown eases, which is most likely expected from June 1, 2020. FPIs, too, were seen selling aggressively, which is in divergence to their stand in developed markets; since US market has started attracting global capital for risky assets on the back of liquidity and stimulus.

The firm stance taken by governments across the world against China may lead to further deterioration in economic relations, which would keep markets under pressure in the medium term. Absence of good news on the horizon may take markets lower and Nifty may head towards the 8,500 mark in the near term.


Event of the Week
In the wake of rising recessionary concerns in the economy, the Reserve Bank of India tried to put its best foot forward in terms of monetary easing by slashing the repo rate by 40 bps and extending the moratorium on loan repayment by another three months. This moratorium extension without a doubt would ease the ground-level gridlock, but is perceived as negative for the listed banks and NBFCs. The extension may raise the possibility of delinquency rates, crippling their balance sheets which in turn would impact profitability. Higher inflation in the short term due to supply-side shocks is a big worry. Though RBI is expecting it to cool down in the second half, this may not happen as a good part of the supply chain would take a long time to normalise.

Therefore, higher inflation and lower interest rates will reduce purchasing power of consumers/investors further reducing consumption in the economy. At best, one can hope that things will normalise by next two quarters. Fingers crossed!

Technical Outlook
Nifty50 is now on a declining streak for last three weeks. After a 30 per cent rally from the lows, the index is now trading 20 per cent off from the lows. However, the banking index remains relatively weaker and is just 8 per cent off the lows. Indian indices have decoupled with global markets and underperformed in the last couple of weeks. Support and resistance levels have now shifted to 8,700 and 9,200 levels, respectively on the Nifty50.

In the week gone by, the index formed a Hammer-shaped candlestick pattern, which will get confirmed on a close above 9,200 in the following week. However, looking at the weakness in the banking space, which holds a substantial weight in Nifty, it seems both the benchmark indices are going to slide. We maintain a mildly bearish outlook going ahead. Any weakness in global market will only create further difficulty for the bulls to hold the market.

Expectations for the Week
The market is surrounded by negativity and the only thing that can really bring back confidence in these dark days is discovery of a drug to fight Covid-19 or a vaccine to keep it away. Quarterly numbers in developed markets, such as the US, are almost over and the commentary from US CEOs and the Fed Chairman are all pointing towards the fact that the worst is still be ahead of us. Therefore, Indian bourses will mirror their economic trajectory going forward. Investors are advised to stay away from investing new monies and conserve cash.

Nifty50 closed the week at 9,039, down 1.1 per cent.