The Week Ahead on Dalal Street, here are 10 Key Factors that will keep traders busy next week

By Aryan Jakhar On Jun 12, 2022

Inflation risk, GDP concerns, elevated oil prices, and FII selling shattered the market’s three-week winning streak, with the market falling more than 2% in the week ended June 10. Friday’s trading was abysmal, with the BSE Sensex plummeting almost 1,000 points in one day.

The BSE Sensex plummeted 1,466 points, or 2.63 percent, to 54,303 points this week, while the Nifty50 fell 382.5 points, or 2.3 percent, to 16,202 points, while the Nifty Midcap 100 index down 0.8 percent and the Smallcap 100 index fell 1.1 percent.

Experts predict the market to continue volatile in the next week, with the market reacting first on Monday to US inflation data that hit a 40-year high and April industrial output data, both of which were issued later on Friday. Experts say that in the coming week, bears appear to be more active than bulls, with all eyes on the Fed’s interest rate decision and CPI inflation statistics.

“Markets are again reeling under tremendous pressure across the globe citing sticky inflation which could prompt swift actions by the apex banks ahead. Indications are pointing towards the prevailing negativity to continue, however, bargain hunting in select index heavyweights could cap the damage,” Ajit Mishra, VP – Research at Religare Broking said.

Yesha Shah, Head of Equity Research at Samco Securities, encouraged investors to exhibit extreme caution until markets clearly determine their way in the face of rising macro concerns.

The following are ten important reasons that will keep traders active next week:

Inflation

CPI inflation is a critical aspect to keep an eye on, especially after the Reserve Bank of India boosted its full-year prediction for FY23 by 100 basis points to 6.7 percent, well over its target range of 4% (+/- 2%). For its inflation forecast, the central bank took into account the $105 per barrel price of crude oil, the difficult global geopolitical scenario, and the hope of a decent monsoon, among other things.

Experts predict that the CPI inflation rate for May will be around 7.1-7.3 percent, down from 7.79 percent in the previous month, which was the most since May 2014. Inflation statistics for May and June will be crucial for the central bank’s decision on repo rates at its August policy meeting, with experts predicting that the repo rate will be in the 5.5-6.0 percent range by December.

On June 13, CPI inflation data will be issued, and on June 14, WPI inflation will be announced. According to Yesha Shah, market participants will closely examine whether import duty limits and rate hikes have had a favourable influence on inflation data.

Meeting of the FOMC

Next week, on June 14-15, the Federal Open Market Committee will have its two-day meeting, which is considered to be critical, especially following higher-than-expected inflation in May, which hit a 40-year high of 8.6%, the most since December 1981.

The volatility in equity and bond markets (with US bond yields at 3.16 percent versus 2.94 percent on a week-over-week basis, and the US dollar index at 104.23 versus 102.16 on a week-over-week basis) clearly indicated that inflation has not yet peaked, resulting in the Fed’s aggressiveness with regard to rate hikes in the second half of this calendar year. Economic projections and Jerome Powell’s commentary will be closely watched next week, experts said, adding

Price of Oil

Last week, crude oil prices stayed around or above $120 per barrel, much above the Reserve Bank of India’s $105 per barrel assumption for full-year inflation projections. This is a critical concern for India because it is a net oil importer, and it could be one of the factors limiting equity market upside for several months.

Fears of a recession and a Chinese lockdown to address the Covid problem may weigh on oil prices to some extent, but experts believe that limited supply amid geopolitical concerns will keep oil prices elevated in the coming days.

On a week-over-week basis, international benchmark Brent crude futures settled at $122.01 a barrel, up 1.9 percent from $119.72 a barrel.

Export-Import Balance

The official balance of trade data for May will be essential to observe next week, as preliminary data showed that the trade deficit in May 2022 increased to $23.33 billion, a new high, compared to $6.33 billion in May last year, which was damaged by the harsh second Covid wave.

According to preliminary data, imports increased by 56.14 percent year over year to $60.62 billion in May 2022, owing to petroleum and crude oil imports, while exports increased by 15.46 percent year over year to $37.29 billion, owing to petroleum products, electronic goods, and RMG of all textiles.

FII Selling

Given the negative attitude around the globe due to increased inflation fears amid geopolitical tensions and faster policy tightening by central banks, FIIs continued to sell aggressively in emerging markets, including India. As a result, experts predict that the factor will continue to limit equity market upside.

For the eighth month in a row, FIIs have been net sellers, dumping more over Rs 3.45 lakh crore since October 2021, compared to Rs 2.63 lakh crore in net purchase by domestic institutional investors during the same time.

FIIs have net sold Rs 12,662 crore worth of shares in the last week, but DIIs have compensated to a considerable extent by buying Rs 9,611 crore worth of shares in the same time period.

Indian Rupee (INR)

Given ongoing FII selling, rising US bond rates, elevated oil prices amid supply tightness due to geopolitical tensions, and inflation fears, the Indian rupee touched a new record low of 77.87 against the US dollar on Friday. The US dollar index, which compares the value of the US dollar to a basket of the world’s top six currencies, is currently trading over 104.

Apart from the reasons stated above, the domestic currency market will be closely watching the Fed’s move next week. Experts predict that the currency will drop between 78.20 and 78.50 per dollar in the near to medium term.

Aspects of Technology

On the daily and weekly charts, the Nifty50 has seen a bearish candlestick pattern as it has forcefully broken important supports of 16,400 and 16,250 in a single session, signalling a clear anxiety on the street. To settle at 16,202, the index fell 1.7 percent on Friday and 2.3 percent for the week.

With the market in bearish territory, experts believe the index can find support around 15,900-16,000, but if it is broken, it might fall to the May lows.

“The benchmark appears to be moving towards the support zone between 15,900 and 16,100. Despite the fact that last week’s trading patterns suggest additional downside, the overall bearish momentum has moderated as Nifty is currently trading above the falling resistance line. As long as Nifty does not fall below 15,900, there is a significant chance that it can test 16,800 levels,” Yesha Shah advised traders to maintain a neutral stance in the coming week and avoid aggressive transactions on either side.

Cues for F&O

According to option data, the Nifty could trade in a wider range of 15,800-16,700 in the coming sessions, with 16,000-16,200 being the critical levels for stability, according to experts.

Maximum Call open interest was found at 17,000 strike, followed by 17,500 and 16,500 strike, with Call writing at 16,200 and 16,300 strike. Maximum Put open interest was noticed at 16,000 strike, followed by 15,500 and 15,000 strike, with Put writing at 16,200 strike.

“Going ahead, we believe the Nifty should consolidate above 16,200. However, sustainability below it may bring extended selling pressure towards 15,800 once again,” ICICI Direct said.

Despite the significant sell-off experienced on Friday, the volatility index has stayed low below 20 levels, according to the brokerage. As a result, it predicts that large drops are unlikely, and that the Nifty will consolidate above 16,200 in the coming week. The fear index for India, the VIX, closed at 19.58 on Friday, up 2.27 percent from the previous day but down 2% for the week.