Weak global cues to increase volatility in markets

Indian equity markets ended the week in red on the back of rising COVID-19 cases in India, an extension of lockdown, the disappointing economic package, and extension in loan moratorium period by three more months.

Even increasing trade tensions between US-China kept the global markets under pressure, despite very early stage positive results attained by US-based Moderna Inc in its experimental COVID-19 vaccine.

Oil prices also came under pressure as tensions rose between the United States and China, and doubts grew about the pace of demand recovery from the coronavirus crisis.

For the week, both Nifty50 and Sensex were down 1.1%/1.4% respectively to close at 9,039/30,673 respectively. The overall market breadth was negative with Nifty Midcap100/ Smallcap100 down 2.5%/2.1% respectively.

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Sectorally it was a mixed bag. While Banks, Financial Services, and Metals dragged the market, down8.3%/6.9%/1.8% respectively, Pharma (+5.6%), IT (+4.9%) and FMCG (+3.1%) provided support. Foreign institutional investors (FIIs) continue to be net sellers having sold equities worth Rs 6,920 crore this week while domestic institutional investors (DIIs) were buyers of equities worth Rs 3,940 crore.

RBI in a surprise move on Friday announced a Repo Rate cut of 40 basis points to 4% and lowered the Reverse Repo Rate to 3.35% from 3.75%. It also extended the loan moratorium period by another three months till August 31 and raised the limit on banks’ group exposure to companies. Though this is a welcome step and can provide relief to the borrowers, there is a fear that the burden on the banks may further increase due to the impact of the moratorium on banks’ already huge pile of NPAs.

Further RBI failed to announce any relief on the restructuring of loans to address the risk of rising asset quality issues in the banking sector.

Meanwhile, global sentiments are weak as China has moved to impose a new security law on Hong Kong after last year’s pro-democracy unrest, further straining fast-deteriorating US-China ties.

Additionally, China has announced that it has dropped its annual growth target for the first time, which further added to concern about the fallout from the COVID-19 pandemic.

In the near term, the market will focus on global cues and quarterly results. The earnings season and the management commentaries so far have not been encouraging.

Thus, markets are expected to remain volatile in the near term given weak fundamentals and fear of the second wave of infections amid the re-opening of many countries from lockdown. Till the earnings don’t revive and the FIIs continue to be net sellers, markets are likely to remain under pressure.

Investors will closely monitor the development of coronavirus cases and vaccines, US-China relationship, crude oil prices movements, and economic policies.

Technically, if Nifty manages to sustain above 9150 levels, then we may see a bounce towards 9,300-9,350 zones. On the flip side, support is placed at the 8,900-8,800 zone.