By Rahul shah
Equity benchmark indices registered their third weekly drop in four amid risk-off sentiment triggered by worries over global growth and the future course of interest rates. Sentiment dampened across the global markets on account of the global banking crisis intensified and spread from the US to Europe. As a result, Nifty slipped 313 points or 1.8% to close at 17100 while Sensex dropped 1145 points or 1.9% to close at 57990. However, Nifty recovered partially in the last two sessions from the 5-month low at 16850 after the relief package was provided to First Republic Bank and Credit Suisse. On the domestic front, FIIs were net sellers of nearly $1bn (Rs7990cr) during the week which is also a major concern in the market. However, the oil prices fell to a 15-month low, local fund buying interest (DIIs net buyers over Rs9000cr) and February WPI fell to a 25-month low at 3.85% have protected the market from lower levels.
Among the global economic data, US CPI data for the month of February came at 6% vs 6.4% in January, in line with the market expectation. US Retail Sales and Consumers data announced reported better than expected. On the other hand, ECB hiked the interest rate by 50bps to 3.50% in line with expectations.
Banking, auto, mid-cap, metal and small-cap stocks were major losers this week. Financial turbulence in the global banking systems has a negative impact on banking stocks. Metal stocks declined due to falling base metal prices on LME and a slowdown in the global economy. However, oil marketing and paints stocks gained this week due to the benefit of a fall in oil prices.
Markets remain focused on what the Federal Reserve will do this week. US Fed interest rate decision will be released on 22nd March and the Bank of England policy meeting will be held on a subsequent day. The collapse of Silicon Valley Bank (SVB), followed by a 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, financial turbulence in the Swiss investment giant Credit Suisse AG group had a negative impact on the market and across the global banking systems. The financial market volatility has clouded the economic outlook and will likely lead the Fed to pause its tightening cycle at this week’s meeting. US banks deposited $30 billion into First Republic to help rescue the mid-sized lender while the Swiss Government announced $54bn financial support to Credit Swiss Group AG. This may provide some short-term relief to US and European banks. All eyes will be on the US Fed’s course of action they will take and commentary to stabilize the financial system.
It is interesting that the difference between US 2-year and 10-year bonds fell to narrow just 40bps this week (10year at 3.4% while 2-year at 3.8%) while 2-week before it was 100bps difference (10year at 4% while 2-year at 5%). It means short-term pain is likely to reduce and the US Fed may cool down its aggressive stance in the next policy meeting after recent financial turbulence in the US and European Bank. Moreover, yesterday, the People’s Bank of China reduced the reserve requirement ratio for almost all banks by 0.25 percentage points which aims to adequate liquidity in the banking system. China cut the reserve ratio at that time when a couple of days before the ECB hiked interest rates by 50bps and the US Fed policy meeting was to be announced next couple of days. It means every country has their own policy to protect its economy. From that point of view, US Fed will see their own interest and protect their economy after the recent collapse of two major banks Silicon Valley Bank and First Republic Bank. So, US Fed is likely to pause the rate hike or merely a 25bps hike in interest rate. Moreover, it is expected that the US Fed to take a dovish tone in its 22nd March policy meeting rather than a hawkish tone which has been announced several times. US Fed commentary will be important rather than the hike in the interest rate or the pause of a rate hike. Moreover, a short covering may not be ruled out as FII short position stands at nearly 89% in the market which is also almost near to the reading which was witnessed during the Covid period.
Technically Nifty has formed a Doji candle with a long lower shadow on a daily scale and negated the formation of lower lows of the last seven trading sessions. Now, it has to hold above 17071 zones to witness a bounce towards 17171 and 17250 zones, while on the downside supports are seen at 16950 and 16800 levels.
Petronet – CMP: Rs 232 – SL: Rs 228 – Target: Rs 248
Petronet has formed a strong bullish candle on a daily scale and managed to close above its crucial resistance zone in spite of market volatility. RSI is also picking up which is showing positive momentum and holding well above its short-term moving average. Buy Petronet with a stop loss of Rs 228 and a target of Rs 248.
MGL – CMP: Rs 984 – SL: Rs 965 – Target: Rs 1030
MGL has formed a pole and flag pattern on the daily scale and it has formed a bullish candle which indicates strength in the counter. RSI on the daily and weekly scale is showing a positive setup which will support higher levels. Buy MGL with a stop loss of Rs 965 and a target of Rs 1030.
(Rahul shah is Senior Vice President, Group Advisory Leader-PCG, Broking & Distribution at Motilal Oswal Financial Services