Geopolitical Tensions and Interest Rates Keep the Markets Subdued
After a long weekend which ended on a buoyant note, the Nifty ended the first trading session of the week with a bearish engulfing candlestick pattern. The occurrence of such a candle after an up move and near the resistance point of 100 DMA certainly sent shivers down the spines of bulls as in recent times we have seen that the fall in the market has been brutal and one-way. However, calming the anxious nerves of the bulls was the RBI Governor Shaktikanta Das’ statement that said that there is no prospect of the economy falling into a stagflation vortex and retail inflation is expected to moderate going forward.
This is notwithstanding fears of imported inflation given the massive spike in commodity prices, especially crude oil, after Russia invaded Ukraine last month. With such soothing comments from Das at one end and the 10-year US Treasury bond yield notching a fresh multiyear high on the other, market participants entered into a state of flux and this was quite evident from the fact that the market did not see any follow-through move on Wednesday to the positive movement seen on Tuesday. Though Nifty made an attempt to surpass a hurdle which was present in the form of 100 DMA in the early part of the trading session, it failed to hold the early gains and slipped lower, forming a dark cloud cover like candlestick pattern on the daily chart.
This see-saw like movement in the markets flared a sense of uncertainty among participants and this was quite evident from the fact that India VIX, which measures expected volatility in the market, inched up nearly 6 per cent on WTD basis and was seen knocking on the door of the 25-mark before cooling off slightly. We believe volatility has to fall below the 20 mark for stability and to bring the bulls back on street. However, we suspect this would happen in a hurry amid oil prices holding on to the recent gains, powered by ongoing talks related to an embargo on Russian exports into the EU and the weekend attacks on Saudi oil and gas facilities in the Gulf by Iranian-backed Houthi rebels.
Amidst all this, the good news is that India’s merchandise exports cross record USD 400 billion in the ongoing fiscal, led by agricultural products and engineering goods, as stated by Commerce Minister Piyush Goyal. The country’s export stood at USD 298.1 billion in the previous fiscal. Interestingly, the highest ever monthly merchandise exports were recorded at USD 39.3 billion in December, the Department of Commerce said in a statement. Meanwhile, in the future markets, odds are rising that US Federal Reserve is likely to become more aggressive and raise interest rates by 50 basis points at each of its next two meetings as inflationary pressures continue to accelerate amid surging commodity prices and supply chain disruptions linked to China’s renewed surge in corona virus cases.
Given the fact that the ongoing peace talks between Russia and Ukraine have not yielded any significant progress and inflation is not likely to recede, these two factors may act as two wild cards that could even force the RBI to reset its recent dovish policy. Hence, watch out! Technically, the make-or-break Nifty’s support was seen in the zone of 16,950-17,050. Only below this zone may we expect a waterfall of selling which could push Nifty down to levels of 16,600 in the near term. Meanwhile, from a technical standpoint, the landscape of Nifty 50 index would improve considerably only if it closes above its biggest hurdle at 17,450-17,500. Sustenance above this level would help the index march upwards to the 17,800-18,000 mark in the near to medium term.
