BSY’s exit, crude may take Nifty to 10400

New Delhi, May 20: Political drama emerging out of Karnataka as well as boiling crude oil prices, which are hovering near the $80 a barrel, are enough to take the Indian market lower. The latter has already plunged over 300 points from the recent highs of 10,930 recorded on May 15.
The market might have factored in a non-BJP government in Karnataka to some extent but worsening macros is something which might have larger ramification for markets, experts suggest.
The incumbent Chief Minister for two days, BS Yeddyurappa resigned from his post on Saturday and the governor invited Congress-Janata Dal (Secular) alliance to form the government. HD Kumaraswamy will be sworn in as Chief Minister of Karnataka on May 23.
AK Prabhakar, Head of Research, IDBI Capital, expects markets to open negative on Monday. “Worsening macros as well as opposition unity can have an impact on markets. The Nifty which has already broken key support levels last week could well head towards 10,400 levels in the next two weeks.”
A slip towards 10,400 from current levels translates in a fall of nearly two percent, or about 200 points, from current levels. “Mid and smallcap stocks are already facing the heat and over 250 stocks hit a fresh 52-week low on Wednesday. Hence, the market could remain under pressure for some more time,” he added.
Commenting on the ongoing fall in the markets which resulted in the Nifty breaching 10,600 levels, Ajay Bodke, CEO and Chief Portfolio Manager PMS at Prabhudas Lilladher, said as the Bharatiya Janata Party (BJP) failed to prove its majority in Karnataka, the sharp correction that is underway is likely to gather momentum.
“Investors are advised to stick to companies with stable, steady and visible earnings growth in sectors such as retail-focussed private banks, fast moving consumer goods (FMCG), retail, and automobiles. Investors need to tread with caution in sectors such as aviation, logistics, oil marketing companies (OMCs) and tyres.”
Oil prices fell on Friday, but Brent crude marked its sixth straight week of gains, boosted by plummeting Venezuelan production, strong global demand and looming US sanctions on Iran, a Reuters report stated. Brent crude futures fell 79 cents, or one percent, to settle at $78.51 a barrel. The global benchmark on Thursday broke through $80 a barrel for the first time since November 2014.
“Impact of the Karnataka political outcome will be short-lived. This is unlikely to impact the prospects of the National Democratic Alliance (NDA) in the 2019 general elections. Of immediate concern to the market will be the impact of crude at $80/bbl on inflation, interest rates, exchange rate and the GDP growth rate,” VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, told Moneycontrol.
He sees the market upside capped with the macros turning unfavourable on account of the crude spike. “If crude continues to rise and crosses $85, there will be a sell-off in the market. Otherwise, the market will remain rangebound.”
According to Vijayakumar, the recent sell-off in small and midcaps will continue for a few more days due to the mutual fund restructuring. This will also provide opportunities to buy some quality small and midcaps.
As many as 168 stocks on the NSE hit a fresh 52-week low on Friday. These include: Crisil, Ceat, ACC, ABB India, Jet Airways, Bharti Airtel and DB Corp. On the BSE, as many as over 250 stocks hit a fresh 52-week low including: Ajanta Pharma, KPR Mills, Strides Shasun, Cadila Healthcare, LIC Housing Finance, and Tata Motors.
Technical view
The Indian equity market fell for the fourth consecutive session on the backdrop of political uncertainty, and deteriorating geopolitical climate, and rising crude prices.
The Nifty took a breather despite a positive opening on Friday and fell below its crucial support of 10,650-10,600. It closed at 10,596, down about two percent on a weekly basis.
“With a negative breakout from its short-term moving average, the index formed a long bearish candlestick pattern on the daily price chart, indicating sustained pressure for the index. It signalled negative strength from the secondary indicator, with its weekly RSI slipping to 55 levels,” Dinesh Rohira, Founder and CEO, 5nance.com, said.
He added that the market breath is in a negative trajectory. “Rising crude oil prices may lead to inflationary pressures for the domestic economy. Coupled with the weakening of rupee against the dollar and the political scenario in Karnataka, overall market breadth is currently in favour of a negative trajectory.”