Index outlook: Markets throw a tantrum to ward off rate hike

There was broad-based selling in global equity markets last week. The Sensex and the Nifty too slithered lower in step with other benchmarks.

With the Federal Reserve meeting — which will decide when the rate hikes will begin — scheduled for September 16-17, volatility is only going to increase.

This is equity markets’ way of throwing a tantrum to make the Fed Chair postpone the rate hike to next calendar.

The last time this happened in mid-2013, Ben Bernanke had postponed the tapering of the QE by a few months. It is to be seen if Yellen does the same.

The US jobs data is the last major factor that the Fed considers for deciding on the rate hike. And the jobs data was quite strong. US employers added 173,000 employees last month and the jobless rate at 5.1 per cent is the lowest since April 2008.

The FOMC’s target of maximum employment has been met.

While the headline CPI inflation in the US is growing 0.2 per cent, the Core CPI — the inflation for all items excluding food and energy — is growing closer to the FOMC target at 1.8 per cent. It is not surprising that financial markets are extremely nervous right now.

If the Fed indicates that it will raise rates a few months later, there could be temporary reprieve. There will be a relief rally that will not last for long.

The worst case scenario will unfold if a rate hike is announced in this meeting. We will then have to brace ourselves for a big sell-off.

The reason? It is because a chunk of the FPI money that has been flowing into our market over the last five years has been funded by dollar carry trade that came into existence due to the near-zero interest rates in the US.

As rates increase in the US and the dollar appreciates in value, the borrowers will sell assets they have purchased to repay the dollar loans that will turn pricey now. The pull-out of FPIs from the Indian equity market so far has been quite worrisome. They have net sold close to $467 million from equity last week. Their net sales in August totalled $2.5 billion.

Macro data released last week wasn’t too good. The GDP for the June quarter grew at a slower rate of 7 per cent and the eight core industries grew at just 1.1 per cent in July.

With the monsoon rainfall received so far falling 12 per cent short of long period average, the Indian equity market is on a very slippery slope.

How they oscillate Daily oscillators continue plunging into the negative zone and the lower peaks and troughs in the price rate of change oscillator imply that the trend remains firmly down.

The monthly oscillators moved deeper into the sell territory. This is the first time since August 2012 that the monthly ROC has moved into the negative zone.

As mentioned in our last column, this is a negative factor. But we will track this indicator over the next few weeks before drawing any conclusion.

Nifty (7,655) The Nifty could not get past 8,060 last week and instead fell to close at an 11-month low.

The week ahead: The base of the gap at 8,090 thwarted the Nifty last week and the index reversed to close near its previous trough.

As explained last week, the targets of the third wave, down from the 9,119 peak, are 7,925 and 7,475. Since the index is unable to hold the first target, a gradual move towards the second now appears possible.

In the week ahead, rallies will face resistances at 7,809 and 7,917. Reversal from either of these levels will be the cue for traders to initiate fresh short positions.

The zone between 8,000 and 8,100 is now a formidable resistance that needs to be crossed to signal that the short-term trend is turning positive.

Short-term targets downward are 7,584 and 7,423.

Medium term trend: The medium-term trend turned negative with last week’s close.

It is now to be seen if the index makes a base just above 7400, paving the way for a long-term consolidation phase or plunges lower. Decline below 7,400 will open the floodgates of selling and pave the way for decline to 6,844 or lower.

Sensex (25,202) The Sensex too closed on a bleak note last week.

The week ahead: There is a possibility of a rally that takes the index higher to 25,721 or 26,068 over the week.

Reversal from either of these levels will be a cue for going short on the index. The short-term view on the index will turn positive only if the index manages to move past the recent high at 26,687.

Downward targets, if the week begins with a crash, are 24,661 and 23,409.

If we consider the Fibonacci retracement of the upmove from August 2013-low, we get the supports at 23,800 and 22,350.

Global cues Major global benchmarks have erased all the gains recorded in the early part of the year and are currently in the red.

The extension of the fall last week has taken many benchmarks close to critical long-term support levels.

The Dow is one such index that closed at 16,100. This is a critical medium-term trend decider. If there is a fall below this level, the Dow can decline to 15,300 or 14,400.

The S&P 500 cracked in August after trading in a very narrow band for almost a year. This index can now head towards 1,820. A break below this level can make the index head to 1,734.

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