Index outlook: Stay clear of the market

It’s the D-day and it is doubtful if anyone even wants to read the newspapers. Most investors and market watchers would be more preoccupied with reserving their favourite chair and getting chai-naashta ready for the Finance Minster’s speech.

The day the Budget is presented is perhaps the most important day in the stock market calendar. We have seen major trend reversals happening on this day in the past, both upward and downward. This influence has, of course, diluted over the past two decades due to the growing clout of foreign investors and the higher correlation of Indian markets with their global counterparts.

But even then, we can expect some sharp movement on the Budget day, depending on what Arun Jaitley says and how it is interpreted by the markets.

This year, the Budget is being presented against a very difficult backdrop. Stock markets have taken a very sharp cut since the beginning of this year and Indian equity market is among the worst performers among its global peers so far this year. Bond yields are spiking higher, causing losses to fixed income investors; commodities are in the pits and real estate market is not doing too well either.

So what do financial markets want from the Budget this year? They would want the fiscal deficit for FY 17 to be close to the target of 3.5 per cent of GDP that was laid down in the last Budget. If it moves to 3.6 or 3.7 per cent of GDP, that is ok. But 3.8 or 3.9 is going to cause nervousness. The rating agencies — Moody’s, S&P and so on — will start frowning and foreign portfolio investors who have already been net sellers in Indian market can intensify their sales in equity.

The fiscal deficit number is also important for bond markets due to the impact it has on the supply of G-secs. If the fisc goes close to 4 per cent of GDP, we can have the yields spiking above 8 per cent. That would be bad for bond investors and companies that borrow close to market rates.

Given the tight fiscal situation, too many sops on income tax are unlikely, but equity markets would like some solid measures announced to address the crisis that is brewing in public sector banks. Some innovative means to infuse funds into banks, proposal to push through bank consolidation, reduction of government stake in PSBs, pushing through the bankruptcy bill etc will help improve the sentiment to some extent.

The Finance Minister has announced that the retrospective tax amendment issue will be addressed. Some clarity on that and, more important, if the government can ensure that the IT department toes the line that the government takes on these issues, it will help buoy FPI sentiments greatly. Further, postponing GAAR is another way by which the FM can win over FPIs without hurting the exchequer too much.

Both investors and traders should however stay away from market in the early part of the week. While the adrenaline rush from trading on the Budget day could lure some traders, on the whole, it might be a good idea to wait for a few sessions after the Budget to understand the trend in the market.

The Nifty gave up all the gains made in the previous week to close 181 points lower. The short as well as medium term trends are quite weak for the Nifty.

The week ahead: The short-term resistance for the Nifty stays at 7,325. The index could not reach this level last week, denoting short-term weakness. But Budget days can be pretty unpredictable. So here are some guide-posts for trading on this day.

If the Nifty manages to rally, it will face resistance at 7,140, 7,252 or 7,325. Watch out for downward reversal from either of these levels.

Inability to move above 7,140 will mean that there will be weakness ahead. Downward targets are then at 6,869 and 6,775.

However, a move above 7,325 will mean that the Nifty is well on the recovery path and the next target is 7,470.

Medium term trend: The key long-term support, as we have discussed over the previous weeks, is at 6,300.

The first medium-term target on the downside is at 6,728. If that is breached, the index can move towards the long-term support level at 6,300.

Most global markets built on their gains last week, helped by the improvement in crude oil prices. The CBOE VIX moved lower to hit the low of 18.4, reflecting the investor sentiment.

The Dow managed to gain further ground. But it is still below the hurdle at 17,000. A strong move above 17,000 is needed to signal that the index is out of the woods. Else, it can fall back to 15,500.

Hang has managed to hold on to the recovery that began the previous week but the Shanghai Composite Index has reversed lower, giving up almost the entire gains made in the previous week. The spike in the dollar index is a cause for concern. The shallow fall underlines the strength in the greenback and re-opens the possibility of another rally to the 100 level.

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