Are markets avoiding key risks? Here’s what you should do now

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Indian markets had been on a ‘Make and Break’ new lifetime highs pattern at the start of the week, echoing the uptick of global market indices in their ascension to the top. However, mid-week, developed nations showed signs of weariness, particularly after Fed minutes confirmed likely tapering, July retail sales data in the United States fell short of expectations and China announced sub-par growth rates for the month of July. Normally, India follows their lead but it maintained a relatively stable stance mid-week as the worst-affected industries actually recovered in July despite the pandemic.

The equity benchmarks ended with small losses after high volatility for the week ended August 20. The Sensex and the Nifty retreated after scaling record highs during the week. Fears of the delta Covid-19 variant and China’s tech crackdown impacted sentiment. The Sensex fell 107.97 points or 0.19% to settle at 55,329.32 during the truncated week. The Nifty 50 index lost 78.60 points or 0.48% to settle at 16,450.50.

July retail sales were 72% of pre-Covid levels, 61% more travellers took to the skies compared to June, and the hospitality industry witnessed higher occupancy. Even Nomura’s India business resumption index, which dipped in March 2020, surpassed the 100-point threshold for the first time and settled at 101.2. “With recovery evolving in the most afflicted sectors, it needs to be seen if India can sustain its present level of commercial vigour to drive this rally even farther, Samco Research said in a note.

Samco Research further added that the resurgence of the Covid-19 variant, particularly in China and the United States, poses the question: have Indian investors turned a deaf ear to the potential effect of a third wave?

“The aforementioned question spirals further and deeper with each 52-week high we achieve and fresh daily surge in cases throughout the world. While markets have a tendency to advance, a single piece of bad news may create a downturn with double the ferocity, wiping out investor’s wealth in an instant. Hence, market participants must not underestimate markets and keep in mind that there are risks of a third wave. Although the tempo of industry recovery and immunisation is increasing, the ultimate dictator will be the intensity of the third wave and how investors respond to it if and when it occurs,” the brokerage added

Event of the week

Crude oil rose by 48% in the first half of the year, but the price of brent has fallen by 11% since the beginning of August. The major cause of correction is the extensive spread of Delta variant which is imposing mobility limitations and hurting demand, and an increase in supply of 4 lakh barrels per day by OPEC+ beginning in August. Crude oil futures on the MCX fell as well, as traders trimmed their positions amid a weak spot demand. Crude prices are expected to be under pressure unless there is a secular indicator of economies returning to normalcy.

Technical Outlook

Samco Research added that the Nifty 50 index closed mildly negative for the week and formed a shooting star candlestick pattern which is a bearish sign. While Nifty has been outperforming major developed and emerging market indices, a shooting star candle hints at a mild retracement towards the short-term averages. There could be a dip to 16150. “We suggest traders maintain caution going forward and remain watchful of how the index reacts to the 16150 zone, as any break below the same might lead to weakness in the short term,” it added.

On the other hand, BofA Securities on Friday projected that Nifty50 index can go back to 15,000-market in the near-term. It believes that taper talks in the US, potentially higher US bond yields and USD, consensus EPS cuts, recent muted IPO gains negatively impacting retail investor sentiment and could act as negative triggers going ahead.

Expectations for the week

Markets are anticipated to remain buoyant in the coming week owing to a spate of encouraging July recovery signs. Furthermore, investors may use the monthly expiry rollover data to evaluate momentum and predict if markets will continue their march to fresh highs in September. Moreover, the GDP data for the United States might also impact market sentiment globally. “Investors are encouraged to choose only stocks that are fundamentally sound,” Samco Research said.