All eyes on Fed meeting, global banking crisis this week

This week, global sentiments are likely to dominate the domestic stock markets. Investors will keenly eye the outcome of the US Federal Reserve interest rate decision on Wednesday. This would be followed by the Bank of England interest rate decision on 23rd March.

Last week, domestic equities witnessed a second consecutive week of selling as the global banking crisis intensified and spread from the US to Europe. Equity markets recovered somewhat in the last two days as financial aids came in for some of the troubled banks.

Nifty has fallen by 900 points (5 per cent) in the last one month and is now looking a bit oversold. Even valuations are now comfortable at 17x FY24 P/E. Hence, we can expect a short term pullback over the next couple of days. However, the market structure continues to remain weak given the global volatility and events lined up. We would suggest traders to maintain a cautious stance at higher levels.

On the sectoral front, Defence stocks are likely to see buying interest as the government has approved local purchase of arms and equipment worth Rs 7,0500 crore ($8.5 billion), including BrahMos missiles and weapons systems for the Sukhoi fighter jets. This apart, Metals could see some momentum after China’s central bank cut its CRR by 25bps in an effort to stimulate its economy. Realty stocks too are likely to remain in focus post DLF announcement of record sales growth. With oil hovering at 15-month low, cement, paints and OMCs would also be in focus.

Nifty after falling to a 5-month low of 16,850 during the past week, recovered and managed to close at 17,100 levels (down 313 points; -1.8 per cent for the week). On the other hand, the mid and smallcap indices fell to their 7-month lows.

The collapse of Silicon Valley Bank (SVB), followed by few other mid & small sized banks (Silvergate, Signature bank and First Republic Bank) led to increasing concern over a possible financial contagion in the US banking sector. Later, Credit Suisse too got caught on the wrong side, with its largest shareholder Saudi National Bank denying financial assistance to the Swiss bank.

The banking crisis sparked widespread concern across global equities, taking markets down by 4-5 per cent. However, market sentiments improved after the relief package of $30bn provided to First Republic Bank and as the Swiss National Bank came with financial assistance of $54 billion to rescue Credit Suisse.

The sentiments also got a boost post lower US CPI data for the month of February which came at 6 per cent versus 6.4 per cent in January, in line with the market expectation. This, along with the ongoing banking crisis and slower US retail sales data has raised hopes of a smaller 25bps rate hike by the US Fed in its upcoming policy meeting scheduled on 21-22 March.

On the domestic front, India’s retail inflation for the month of February slowed down to 6.44 per cent while WPI-based inflation eased to a 25-month low at 3.85 per cent in February providing some relief to the markets.

(The writer heads Retail Research at Motilal Oswal Financial Services Limited)