Consolidation phase expected as Sensex, Nifty grapple with valuations and fundamental disconnect

Domestic markets are likely to see a downward bias on Thursday at the opening session. The US Federal’s Reserve’s hawkish stance and weak global markets to keep domestic benchmarks under pressure.

Fed’s hawkish stance

Wall Street ended lower on Wednesday after the Federal Reserve’s minutes showed central bank officials were divided over the need for more interest rate hikes at their last meeting. Gift Nifty at 19,400 indicates another gap-down opening for the domestic markets.

The minutes of the Fed’s July monetary policy meeting showed most policymakers continue to prioritise the battle against inflation, adding to uncertainty among investors about the outlook for interest rates.

With result season behind, analysts expect consolidation phase to continue for Indian markets in the near term.

According to Deepak Ramaraju, Senior Fund Manager, Shriram Asset Management Company Ltd, market is witnessing a time-wise correction, as the valuation of the indices is much ahead of the earnings, ”Though the market will be volatile in the short-term, it is expected to rise once the rate hike is behind and the earnings growth catches up in the medium term,” he told businessline.

Fundamental Vs valuation

Highlighting the growing disconnect between fundamentals and narrative, Kotak Institutional Equities in a report, said the equity market could see consolidation for a while with rich valuations capping upside while other positive factors likely protecting downside. While rich valuations remain a major headwind, the macroeconomic outlook appears reasonable and corporate profits are expected to recover in the medium term on a fall in input costs, it added.

Lack of triggers are likely to keep market under narrow range, said analysts.

“The market has been witnessing pressure on account of weak global cues especially because of the faltering of the Chinese economy and Fitch’s warning to downgrade US midsized banks. Even on the domestic front sharp surge in inflation data and weak monsoon progress in the month of August’23 seems to have dented the investor’s sentiments. We expect this weakness to persist in the market in the near term in the absence of any positive trigger,” said Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services Ltd

Long-Short ratio

Ashwin Ramani, Derivatives & Technical Analyst, SAMCO Securities, said: the Foreign Portfolio Investors (FPIs) Long-Short Ratio fell below the 40 per cent mark for the first time since April 21 and stood at 38.99 per cent as on August 14. The ratio indicates that they hold more short positions relative to long positions in Index Futures. However, strong put writer additions at 19,400 Strike helped Nifty recover from the Intraday low of 19,317 and close higher.

“The level of 19,300 will act as a strong support for Nifty having shown signs of reversal earlier on 7th July and 3rd August from the same levels. Nifty has been moving in 19,300-19,500 since last two days with both these levels acting as a strong support and resistance respectively. A break below 19,300 can drag the Nifty until 18,650 where its next visible support is placed. A strong close above 19,500 is likely to ignite buying interest again in Nifty,” he said.

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