Traders’ Diary: Pricey valuations weighing on market
India Ratings & Research’s Sunil Kumar Sinha on IIP and CPI data
The factory output growth for the month of April 2019 at 3.4% though came in higher than 0.4% last month, it is lower than 4.5% recorded in the same month last year. Nevertheless this is a six month high. At a broad classification level the main thrust to IIP growth came from electricity and mining sector. The manufacturing sector having a 77% weight in IIP is still limping at 2.8%. Despite poor growth in manufacturing some of the sectors that have shown double growth in April are food products, wearing apparel, wood products and printing/reproduction media.
Retail inflation in May 2019 was five months high at 3.05%. However, it has remained lower than RBI’s 4% inflation target now consecutively for 10 months. We believes RBI may continue to pursue policy that would be supportive of growth. The RBI has cut policy rates in last three monetary policy reviews. Although impact of monetary policy is felt with a lag, India Ratings believes there is still a scope of one more rate cut in FY20. However, besides being dependent on data it will also take into consideration fiscal policy stance of the government.
The 11,965 level would be a critical hurdle for Nifty50, breaching which the index can see a rally on an intraday basis. Considering lack of clarity so far, traders are advised to remain neutral on long positions
Daily strength indicator RSI is moving downward and is quoting below its reference line, indicating a negative bias. However, momentum oscillator Stochastic has turned positive from the oversold zone, indicating a possible consolidation or an upward move in the near term. If Nifty crosses and sustains above 11,930, it should see a move towards the 11,980-12,000 range. In case, it breaks below 11,880 level, it is likely to move in the 11,850-11,800 range
The immediate support is placed in the 11,870-11,860 range, a fall below which will pull the index lower towards the 11,810-11,725 range
A very small range-based trading is seen in Nifty since last week’s Thursday. This is the fourth consecutive day we are seeing this range to continue that is of a mere half a percentage. As per the derivatives data, we are seeing the highest concentration of Open interest at 12,000-11,800 indicating short term support at these points. A breach of these levels shall dictate a new trend for Nifty
Focus will shift towards various economic reforms and policies, especially Budget. Fundamentally, the expectations of a strong revival in earnings growth in FY20-21 driven by turnaround in corporate banks and healthy growth in construction/infra companies would provide support to markets at higher levels .We continue to remain optimistic on equity markets and prefer Private banks
Market snapped winning streak as headwinds from global markets and concerns that CPI inflation may rise to 7-month high in May impacted momentum. Further, a steep fall of 21% in passenger vehicle sales added fuel to investors’ concerns over demand and liquidity crunch with NBFCs. Market to consolidate as long as there are no fresh triggers and await for more clarity on how NBFC related concerns pans out
Nifty formed a bearish candle on the daily scale followed by multiple Doji candles, which indicated a tug of war in the 11,761-12,000 zone. Now as long as it holds below 12,000 level, Nifty could extend its weakness towards the lower band of the support at 11,761 level and then see a fresh decline towards 11,660 level, while on the upside immediate hurdles are seen at 11,965 and then 12,000 levels
We expect Macroeconomic data to provide direction to the market. On the global front, we expect choppiness ahead of the Fed meet next week. Further, global indicators (crude oil prices and currency movement) will also infuse volatility in the markets. Hence, we continue to remain cautious on the markets expecting further consolidation
Market is falling under its own weight given that there are no triggers. Therefore valuations are weighing on the bourses. Nifty50 is trading at a P/E multiple 29 times, which is the highest in decades. Statistically, this high valuation sustains for less than 5 per cent of the time in a bull cycle. FIIs too have scaled down their purchases after a euphoric Modi government win. All these factors along with negative international news took the bourses down and across the board selling was witnessed in the market. A post-election victory range of 11,600-11,400 looks reasonable for Nifty
Nifty continues to consolidate in the range of 11,700-12,100; We expect the same to continue for the next few sessions. Trend support for the index is seen at 11,700; if the same is held, we expect a breakout of the mentioned trading range. If 11,700 is broken, significant selling pressure is expected. Broader market health weakened in the last week and we are yet to get a reversal confirmation on the same.
Alembic Pharma to raise up to Rs 300 crore via NCDs
- China stocks fell after the previous session's rally, as weak factory inflation data and prospects of an escalation in the Sino-US trade war curbed risk appetite.
- The blue-chip CSI 300 index fell 0.8 per cent, to 3,691.10 points, while the Shanghai Composite Index lost 0.6 per cent, to 2,909.38 points. China's factory gate inflation slowed amid sluggish commodity demand and faltering manufacturing activity, reinforcing worries about slowing economic growth.
- Auto and auto ancillary stocks plunged in Wednesday’s trade after industry lobby Siam on Tuesday reported a 21 per cent drop in passenger vehicle sales in May, the worst monthly fall in 18 years.
- The slump, attributed to weak demand amid national elections and distress in rural income, has forced auto manufacturers to sharply cut production.
- The BSE Auto index was among the worst performers in Wednesday’s trade, even as the benchmark Sensex traded some 250 points down around midday.
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For Sensex, we think 45,000 is a reasonable one-year forward target and that gives much more upside than we have for global emerging markets. So there is a double digit upside more or less, whereas we have a 2% or 3% upside for global emerging markets.
Given the many headwinds, do you think the market may see a pre-Budget rally over the next four weeks?
PWC resigns as statutory auditor of RCap and Reliance Home Finance
PWC has put in its resignation, with effect from June 11, 2019, citing unsatisfactory response to "certain observations" made by it as a part of the ongoing audit for fiscal 2018-19, the two companies said in their respective regulatory filings to stock exchanges.
Both Reliance Capital and Reliance Home Finance said they do "not agree with the reasons given by PWC".
China auto sales fall 16.4% in May, 11th month of decline
100 stocks hit 52-week lows on NSE
Among the stocks that touched their 52-week lows were Aban Offshore, Adroit Infotech, Bharat Gears, Central Bank of India, Coffee Day Enterprises and Eros International Media.
Indiabulls Integrated Services, IIFL Finance, Manpasand Beverages, Mcleod Russel India, Reliance Communications and Shriram Pistons & Rings also featured among the stocks that touched their 52-week lows on NSE.
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Our analytics group has made a forecast for Brent to be around $65 to $70 a barrel for the second half of the year and it is true that there are a lot of factors out there which could potentially have an impact on global crude oil price. That has been very volatile in recent months and the markets are sort of edgy and nervous about how geopolitical concerns, security issues as well as trade tensions.
Biocon, Suumaya Life, TGB Banquets among top 10 BSE losers
How tech stocks are faring globally
Eros hits 10% lower circuit limit on Moody's downgrade
- Hitting their lower circuits on BSE, shares of Eros International Media plunged 10 per cent to Rs 33.25 in Wednesday's session and looked on course to extend their losing streak into the fifth consecutive session.
- In these five sessions, the stock has come off over 44 per cent.
- Shares of the company extended their fall after the rating agency Moody's Investors Service downgraded the corporate family rating for Eros International Plc to B2 from B1 while changing the outlook to negative from stable.
- Shares of YES Bank declined over 3 per cent to Rs 134.60 in Wednesday's session, a day after the rating agency Moody’s placed the bank’s ratings under review for a downgrade.
- Moody’s Investors Service has placed YES Bank’s ratings under review for a downgrade citing its large exposure to debt-laden nonbanking financial companies (NBFC) and the possibility that the bank’s loans under watch list could slip into non-performing assets (NPAs).
- Meanwhile, Mukesh Sabharwal, chairman of the nomination and remuneration committee of the bank, quit on Tuesday citing personal reasons.