Selling pressure was again seen in Indian stock markets this week. High crude oil prices, continued withdrawal of foreign investors and rising geopolitical tensions have affected investor sentiment. The Nifty 50 fell 2.36 percent, while the BSE Sensex fell around 2.15 percent. This ended the gains of the last two weeks and marked the fourth consecutive session of decline in the market.
The selling effect was not limited to large stocks. Midcap and smallcap stocks also saw sharp declines. Investors reduced their holdings in these stocks due to rising uncertainty, valuation concerns and reduced liquidity. Weakness in cyclical stocks added to the pressure, while IT stocks performed relatively well.
Brent crude has crossed $117 a barrel amid rising tensions in the Middle East and concerns about prolonged disruptions in energy supplies. A rise in US Treasury yields, selling by foreign institutional investors (FIIs) and liquidity concerns related to the Reliance Jio IPO also weighed on market sentiment.
Investors and analysts believe all eyes will be on the US Federal Reserve’s October 27-28 policy meeting, domestic industrial production data and September quarter results. This will determine whether the market stabilizes or further selling pressure continues. Here are five factors that could determine the direction of the stock market (D-Street) next week.
Crude oil prices and geopolitical tensions
Crude oil is a major concern for the Indian equity market. Brent crude prices are rising amid rising geopolitical tensions in the Middle East and fears of energy supply disruptions. The price of WTI crude also crossed $100 per barrel this week.
Ponmudi R, CEO, Enrich Money, said geopolitical risk premiums could remain high due to energy supply uncertainty. Concerns about India’s energy import bill, inflation and corporate profits could rise further if there are any further standoff over Iran and the Strait of Hormuz.
A sustained increase in crude oil prices could increase energy and transportation costs, which could affect domestic consumption and put pressure on oil-dependent sectors. Higher energy prices may further complicate inflationary conditions and raise concerns about the fiscal deficit.
If crude oil prices continue to decline, pressure on domestic macroeconomic conditions may ease and investor confidence may increase. However, if geopolitical tensions and high energy prices continue, equity markets may see further sell-off.
US Federal Reserve Policy
Next week’s US Federal Reserve’s policy meeting on October 27-28 will be an important global factor for the markets. Markets largely expect no change in interest rates, so investors will be watching for central bank guidance on inflation and future interest rate movements.
Hariselavan said that more important than the decision on interest rates will be the guidance that will be provided under the policy. If inflation risks continue to be highlighted, this could push up US yields and boost the dollar, weighing on foreign investment in emerging markets. At the same time, if the guidance remains more balanced, it could lead to some short-term correction in global equity markets.
Higher US Treasury yields have made ‘fixed-income’ assets more attractive, affecting capital allocation and foreign investment in emerging markets. Continued strengthening in US 10-year Treasury yields may affect risk appetite and limit foreign participation in Indian equity markets.
Amid the reversal of the ‘anti-AI trade’ (bets against AI), investors will also be eyeing global tech stocks and speculative growth assets. The direction of US yields, the dollar and global risk appetite will be important in determining whether foreign investors continue to reduce their exposure to Indian equity markets or return to emerging markets.
FII sales, domestic liquidity and Reliance Jio IPO
Selling by foreign investors (FIIs) has been a major drag on domestic equity markets, although domestic institutional investors (DIIs) have helped absorb a large portion of these sales. The total sales of FIIs in the month of October was around Rs. 51,465 crore, while during the same period, DII made about Rs. 59,110 crore net purchases were made. This buying by local institutional investors has helped to prevent a major decline in the market, but it will be important to see if this support continues in the future to keep the market stable.
Reliance Jio’s IPO is another factor affecting domestic liquidity. Singh said this large issue in the primary market has attracted capital from institutional and retail investors, causing funds to move away from secondary market equities and making benchmark indices more vulnerable to selling pressure.
The market’s near-term direction will largely depend on whether buying by domestic institutional investors can offset selling by foreign investors. Reduced outflows from FIIs (Foreign Institutional Investors) as well as continued support at the domestic level could provide further strength to the market. Amid higher yields globally and heavy activity in the primary market, continued selling by foreign investors could put pressure on equities.
Industrial production data and second quarter (Q2) earnings
A round of domestic industrial production data and September quarter results will provide important clues to understand whether corporate performance and economic activity can offset sustained external pressures.
Investors will evaluate revenue growth, operating margins, demand conditions and management comments. This will determine whether companies’ earnings can support their current valuations amid rising energy costs and global uncertainty.
Investors will closely monitor the results and management comments of companies in IT, automobile, consumer-focused and other key sectors. They will see if demand remains strong and if companies’ profits can be sustainable in the future. Recent weakness in banking stocks following disappointing results from some banks has increased investor caution about earnings quality and growth expectations.
Can Nifty save 22,300 level?
According to Ravi Singh of Master Capital Services Limited, the Nifty 50 is down 2.36% this week. With this, the bullish streak of the last two weeks has been broken and the index has moved closer to its 200-week ‘Exponential Moving Average’ (EMA).
Singh said the technical structure of the index remained weak and selling pressure was seen across all sectors except IT. Currently support is around 22,300. If the index breaks strongly below this level, further selling may occur and it may move towards the 22,000 level, which is an important psychological support.
On the upside, the 22,85022,900 range is an important resistance, which is in line with the 21-day EMA. Singh says a ‘sell on rise’ strategy should be adopted as long as the index trades below this resistance. Any attempt at recovery in such a situation may face sustained selling pressure.
