Global headwinds gain pace, but markets to remain bullish

Domestic equities are expected to sustain their positive momentum this week, as the overall trend remains strong. Sector rotation and stock specific action is likely to dominate, given ongoing earnings season. All eyes will be on the Reserve Bank of India’s Monetary Policy Committee meeting this week, especially in light of action seen across global central banks last week.

Nifty, after touching the historical mark of 25,000, witnessed profit booking following weakness in the global markets. It ended the week with a loss of 117 points or 0.5 per cent at 24,718. Broader markets ended on a mixed note, with Midcap100 up 0.3 per cent while Smallcap100 was down 0.3 per cent. India's VIX rose by 13 per cent to 14.32 levels, indicating increased nervousness in the market. Sectorally it was a mixed bag with realty, IT, and auto witnessing profit booking of more than 2 per cent. Energy and pharma on the other hand, witnessed buying interest post encouraging results from these sectors.

Last week was crucial as three central banks announced their interest rate decisions. The Federal Reserve kept interest rates steady but opened the door for rate cuts as early as September as inflation continues to come into line with their target. The Bank of England cut the interest rate by 25 basis points to 5 per cent. In stark contrast, the Bank of Japan raised its benchmark interest rate to ~0.25 per cent from its previous range of 0 per cent to 0.10 per cent and outlined its plan to taper its bond-buying program.

While central banks action boosted investor sentiments, global markets witnessed selling pressure after US Manufacturing PMI data showed contraction and a rise in initial jobless claims to an 11-month high, sparking concerns of a slowdown in the world’s largest economy. This led to benchmark treasury yields falling below 4 per cent for the first time in six months. Further weak earnings outlooks from a few large tech companies have contributed to the negative sentiments.

On the domestic front, the earnings season showed a mixed set of numbers. Even automotive monthly numbers were not very encouraging with July wholesales remaining lower than estimates. This led to profit booking in the auto sector. Agri related stocks are doing well on account of good monsoon progress so far. According to the met department, India received higher than normal rainfall for several regions in July 2024 which is a good sign for agriculture activity.

While the overall trend remains positive, rising geopolitical tensions globally and bouts of profit booking in the domestic market could result in consolidation at higher zones.

(The author is head of Retail Research, Motilal Oswal Financial Services Ltd)