Nifty Closed Almost Flat Despite Positive Global Cues Led By Hardening Of China CPI/PPI & Softening Of Indian Inflation; But Closed The Truncated Week Around 1.3% Lower--What's Next?

Market Wrap: 14/10/2016

Nifty Fut (Oct) today closed around 8611 (+0.36%), almost flat (+31 points), but just finished near late day high of 8614, after trading most of the day in a very narrow range (session low 8665). 

For the week, truncated by 2 trading holidays, Nifty closed almost 1.3% lower having two consecutive lower weekly closing, started from the "Surgical Strike" event.

Technically, for next week, NF has to sustain above 8560-8530* zone; otherwise it may fall further towards 8500/8465*-8415/8395-8315/8265 area in the immediate to short term.

For any meaningful strength, NF need to sustain above 8620-8650* area for further rally towards 8690/8740*-8785/8800-8840/8875 zone in the immediate to short term.

Broadly speaking, time & price action suggests that for any "Diwali Rally" towards 9000-9185 (life time high), NF need to close at least 3 days on consecutive basis above 8740-8875 area and consecutive closing below 8530-8465 zone (for any reasons, whatsoever), we may have some "Black Diwali" this time towards 8050-8000 level. 

Overall, technically, weekly closing below 8740 this week and next week too (if any), may be negative for the overall market and it may be a "dead cat bounce" in that scenario.

Indian market today opened in a positive note following "risk on" global sentiments after China reported better than expected uptick in CPI (+1.9% against expectation of 1.6%) & PPI (+0.1% against estimate of -0.3%). The uptick in inflation data of China somehow helped to ease any immediate concern for the sluggish domestic Chinese economy as portrayed by yesterday's tepid trade balance data (if one take all the Chinese data at their face value of course !!).

Sentiment of global market was also buoyed to some extent by rally in Crude oil helped by better inventory data published yesterday as consumption of more oil by US consumers may be an indication of better consumer sentiment and economic activity.

Globally, all eyes will be on the US retail sales, PPI, U-Mich Consumer Sentiment and Yellen speech today for an idea about underlying strength in US economy and Fed's thinking about overall US economic strength & geo-political scenario and probability of Dec & future path of rate hikes.

After yesterday's "unexpected" fall in CPI at 4.31% (against estimate of 4.80%), today's "surprise" fall in WPI at 3.57% (against estimate of 3.89%) also helped the sentiment of Indian market. The surprise fall in CPI has primarily come on the back of huge fall in food inflation and favourable base effect. The MFG CPI has hardened to some extent along with fuel index and overall core inflation (ex food & fuel) may not had softened too much either.

As par some analysts, gap between CPI & WPI may narrow further in the months ahead supported by better monsoon this year, more than adequate production of food corps/pulses etc, which may give more room for the RBI to cut rates further in Dec'16. Some section of the market may be also looking for an unexpected "Diwali Gift" from the RBI this time after surprise fall in CPI !!

But, with 3 months average CPI at around 5.15% and transmission issues along with 7-CPC induced probable inflationary impact, Patel/MPC may prefer to watch more data & overall inflation trajectory in the months ahead before any real action in Dec'16 and may cut in Feb'17 (core CPI may be more important than seasonal food inflation for the long term).

Despite the positive global & domestic cues, overall market did not rally today, may be because it’s concerned about the Q2FY17 earnings numbers right now. Although, core bottom line are coming so far as par market expectations & that may be already discounted by the market to a large extent, it’s not coming on the back of incremental growth in the top line (EBITDA margin expansion may be the main theme so far and going forward, sustainability of high OM may be quite doubtful).

Moreover, overall guidance & management commentary are not so upbeat, especially from the two IT bigwigs (Infy/TCS) and thus the valuation concern may be keeping the market in check, while we have some selective/stock specific movements for the last few weeks. 

For Q2FY17, market is expecting an EPS growth of around 6-10% (YOY) in Nifty against 3% in Q1FY17. At current Q1FY17 TTM PE of 22.98, Nifty EPS may be around 375 and expected Q2FY17 TTM PE may be around 405 and in that scenario, Q2FY17 FWD PE is around 21.19 now (at NS 8583 level), which is still expensive.

Thus earnings, other domestic news flow (like progress of GST, budget preparations, geo-political tension with Pak) & macros may decide the future course of Indian market along with global events (Brexit, China jitters, EU banking crisis, US election & Fed hike risks etc) in the days ahead. 

SGX-NIFTY