US polls, Europe lockdowns to keep markets choppy with negative bias

Mr Market reacted negatively to the news of a second wave of virus infections in the European countries, leading to a second lockdown in Germany and France, and uncertainties over next week’s US elections, leading the bulls to liquidate long positions. Investor sentiment has turned neutral to negative for the near term, after the non-stop rally seen since March. Next week will be crucial, as the market is expected to witness a rise in volatility due to the US presidential elections.

Back home, the government is trying to revive the economy in bits and pieces. However, the bigger goals of strategic disinvestment to fund a pandemic-induced deficit seems to have gone haywire. PSU companies are, therefore, now deploying the age-old tool of share buyback to return some money back to their shareholders, including the major beneficiary, the government. This should go down well with domestic investors, who can also grab this chance to exit and preferably raise current liquidity buffers. In a way, the buyback trend is likely to support markets, especially PSUs, which may find buyers at lower levels.

This should be the last quarter to reflect buoyant profit-after-tax growth, which accrued due to corporate tax reductions announced on September 20, 2019 with effect from FY2019-20.


Though September quarter performance of a large number of companies looks rosy optically, it is actually the lower tax which has helped improve profitability. Therefore, this acceleration in PAT growth should normalise from next quarter onwards.

Markets have a habit of over-reacting to short-term events and, therefore, there is every likelihood that an intermediate peak will be formed once the Q2FY21 performance gets digested.

Event of the Week
Major economies such as France and Germany have announced a second lockdown amid a resurgence in Covid cases. Global stock markets plummeted in response to this news, as there are chances that these lockdowns could be as severe as the earlier ones, and can drive global economies deeper into recession.

Market players should be wary and keep an eye on such severe possible outbreaks of the virus, especially because India could very well imitate global indices if the situation worsens. Investors are, therefore, advised to remain cautious in this uncertain environment.

Technical Outlook
Nifty50 closed the week on a negative note and formed a bearish candle amid negative cues from the global indices, which have become overbought for the short term. Almost all major sectoral indices closed in the negative led by Nifty Metal and Auto indices. On the downside with Nifty VIX registered a breakout from the consolidation zone of last three months.

We believe a retest of the support from the Rising Channel on the weekly chart is quite probable in the coming weeks and a breakdown below this support level will damage the market’s bullish structure and may trigger a fall up to the next major support at 11,350 level. Immediate support and resistance for the short term are now placed at 11,350 and 11,750, levels, respectively.

Expectations for the Week
Indian bourses are expected to sentimentally mirror global trends, especially the outcome of the US presidential election. Currently, the market is listless and no substantial delivery-based buying or selling is emerging at current levels, which suggest they are likely to remain rangebound. This will create entry points for buyers at lower levels if we see kneejerk reactions next week.

Private banks seem to be better poised to ride the next leg of the rally, as they have managed to trim their deposit rates at a much faster pace than lending rates compared with their PSU peers. Investors should keep their shopping list ready for the next week and initiate buy-on-dips in quality frontline stocks.

Nifty50 closed the week at 11,642, down 2.4 per cent.