The US Federal Open Market Committee (FOMC) meeting will begin Tuesday and end the following day, and will be watched for further cues on the timeline of tapering as well as interest-rate revision. India’s stock indices gained 1% last week, hitting records in the process, fuelled by the government‘s announcement of relief for the telecom sector, steps toward establishing a bad bank and strong foreign flows. The Sensex hit an all-time high of 59,737.32 and the Nifty a record of 17,792.95 on Friday but gains fizzled subsequently on worries that the markets might be overbought.
“From the Fed side, it is very unlikely it will be a negative surprise,” said Piyush Garg, CIO, ICICI Securities. “Some hawkish tone will be there but it won’t be a big trigger for the market because they have prepared the market well on the taper front.” Global financial markets have been nervous of late over the withdrawal of the Fed’s liquidity programme. Although investors have been reassured by chairman Jerome Powell’s relatively dovish remarks, markets are bracing for a start to the dialing back of bond buying later this year.
Crisis at Chinese Developer
“We look for the Fed to signal its intent to taper later this year, conditional on the economy evolving in line with expectations,” said Barclays in a note to clients.
The bank expects a formal announcement on tapering at the November meeting and a start on the withdrawal process in December.
“Although domestic demand has slowed and rising numbers of Covid cases moderated employment gains in August, we think concerns about supply bottlenecks and uncertainty about the inflation outlook will keep the Fed inclined to taper sooner than later,” it said.
Garg said the crisis at one of China’s biggest property developers might be a bigger worry for global investors than the US Fed‘s interest rate outlook.
“Investors may react more to news from China than the US,” he said. “Technically, the market is looking to correct and a small negative event could trigger a correct.”
Chinese developer Evergrande has a total liability of 1.97 trillion yuan, accounting for 2% of China’s GDP. It’s struggling to pay $305 billion to suppliers, investors and lenders due to a cash crunch.
At home, the Sensex is nearing the 60,000 mark and the Nifty is close to the 18,000 level. With the FOMC meeting and China developments on the radar, investors are of the view that the Nifty needs to sustain the 17,800 mark first. Buy on dips remains a preferred strategy for most technical analysts.
At 22.3 times, Nifty’s one-year forward price-to-earnings is now 43% above its 16-year average and nearly at a record high.
“The chart pattern suggests that if the Nifty crosses and sustains above the 17,800 level, it would witness buying, which would lead the index towards 18,000-18,300 levels,” said Rajesh Palviya, head, technicals and derivatives, Axis Securities. “However, if the index breaks below the 17,500 level, it would witness selling, which would take the index towards 17,300-17,100.”
The Nifty may touch the 18,000 mark soon, said Rahul Sharma, head, technical and derivatives research, JM Financial.
“We are not seeing any sign of reversal at current juncture and thus, ongoing momentum may extend further towards the 18,000 mark,” he said. “But it’s advisable to not take aggressive bullish bets at current levels and rather wait for a small price or time correction to initiate fresh longs.”