Nifty breaks crucial 11,200 as these 5 factors dampen market sentiment

Bears tightened their grip over Dalal Street on the first day of the week itself. The BSE Sensex fell more than 300 points intraday on July 29, as all sectoral indices traded in the red with autos, metals and pharma falling most.

The Sensex was down 196.42 points at 37,686.37. The Nifty50 fell below its crucial 11,200 support level, losing 95.10 points to 11,189.20, but the rally in ICICI Bank after Q1 numbers managed to limit the losses.

The broader markets continued to see capitulation, with the Nifty Midcap and Smallcap indices declining 1 percent each.

In fact, year-to-date both Midcap and Smallcap indices fell 9 and 11 percent, respectively, against more than 3 percent gain registered by Nifty50.

After FPI-led selloff, the earnings in June quarter disappointed, sending stocks further down. Among Nifty50 itself, 90 percent stocks traded in the red in the last three weeks and about 30 stocks corrected 5-15 percent.

Apart from expected subdued earnings from auto stocks, the big worry in the current earnings season was asset quality concerns reported by banking & financial sector, which raised questions over FY20 earnings, though some experts talked about recovery in the second half of the financial year.

“The earnings season for Q2 FY20 so far has been slightly below expectations. For the banking & financial sector (which is expected to be a key contributor of earnings), credit costs have been going up, and there is some slowdown in credit growth,” Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance Company, told Moneycontrol.

“However, we are hopeful of a more meaningful recovery in corporate earnings in H2 FY20, and that should be the key driver for the market trajectory, going forward,” he said.

Auto sector woes

Auto was biggest loser among sectoral indices after the government proposed a hike in registration fees for old and new vehicles and changes in scrappage policy to give a boost to electric vehicles. The weak quarterly earnings by Maruti, which posted a 27 percent decline in Q1 profit, and Tata Motors, which posted a loss of Rs 3,680 crore in Q1, ruined sentiment further.

The Nifty Auto index fell 3.6 percent, hitting a fresh five-year low of 6,906 due to fall not only in auto but also auto ancillary stocks.

Motherson Sumi Systems, Bajaj Auto, Apollo Tyre, Tata Motors, Ashok Leyland, TVS Motor, Eicher Motors and Maruti Suzuki were down 2-6 percent.

The Ministry of Road Transport and Highways (MoRTH) on July 24 released a draft notification to increase vehicle registration fees. The two key objectives are to encourage sales of electric vehicles and put in place an enabling mechanism for the scrapping of vehicles older than 15 years.

The government proposes to increase from Rs 50 to Rs 1,000 the registration fee for two-wheelers, while heavy goods vehicle could see the charge go to Rs 20,000 from Rs 1,500.

Global brokerage CLSA believes the proposal is unlikely to boost auto demand and regulatory costs are adding up for the Indian auto industry.

“We entered 2019 with a cautious view on autos & see few reasons to change it,” said the investment firm, which has sell ratings on 70 percent of its auto coverage and recommended underweight stance on entire sector.

US-China trade talks

Globally, too, markets turned cautious ahead of the two-day meeting between the US and China, who have been locked in a bruising year-long trade war.

The meeting will be held on July 30-31 in Shanghai, the first in-person talks since the G-20 truce last month.

Expectations are low, so officials and businesses are hoping that Washington and Beijing can at least detail commitments for “goodwill” gestures and clear the path for future trade negotiations.

These include Chinese purchases of US farm commodities and the United States allowing firms to resume some sales to China’s tech giant Huawei Technologies.

U President Donald Trump said on Friday that China might not want to sign a trade deal until after the 2020 election in the hope that they could then negotiate more favourable terms with a different president. The US is due to hold the presidential election in 2020.

During the G20 summit in Osaka in June, Trump and his Chinese counterpart Xi Jinping agreed to restart trade talks that stalled in May. The talks collapsed after Washington accused Beijing of reneging on major portions of a draft agreement, which prompted a steep US tariff hike on $200 billion of Chinese goods, Reuters reported.

FOMC meet

Apart from Shanghai meet, the US Federal Reserve’s two-day meeting that begins July 30, too, will be closely followed.

Most analysts expect the Federal Open Market Committee (FOMC) to cut interest rate by at least 25bps on July 31, to help the economy grow in the face of trade wars and slowing growth.

US GDP growth in Q2CY19 was 2.1 percent, higher than street estimates but there was some clear impact of tariffs and trade friction.

“The US Fed is almost certain to cut the overnight Federal funds rate by 25bps in its July policy to 2-2.25 percent from 2.25-2.50 percent currently. The market would focus on the Fed communication to draw cues as to whether it is a one off cut or the first cut in a series of cuts,” Abhishek Goenka, managing director and CEO of IFA Global, told Moneycontrol.

Goenka said if the Fed indicates that further rate cuts are on their way, it would imply that the terminal federal funds rate is much lower than earlier thought. “It would lend credibility to the hypothesis that low inflation is indeed structural. It would essentially imply that the Fed has aligned itself with the market. This would be USD negative.”

Technical view

The Nifty50 has broken its crucial support 11,200 level and started trading well below the same, indicating more nervousness after last three-week’s correction.

Experts feel if the Nifty manages to hold its May 2019 low of 11,108 in coming sessions, then then there could be stability but if the same levels breaks then index may move towards crucial 11,000 level.

“Post the budget announcement, market participants looked completely dejected and it’s clearly reflected in the price action thereafter. The overall chart structure looks distorted and hence, till the time we are below 11,550–11,700, the bears remain in the dominating position. As far as supports are concerned, we can see a sheet anchor support of ‘200-day SMA’ which now coincides with May lows of 11,108.30,” Sameet Chavan, Chief Analyst-Technical and Derivatives at Angel Broking, told Moneycontrol.

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