WEEKLY WISDOM

WEEKLY WISDOM

TRAIL STOP-LOSS TO 21070

TREASURY YIELDS PLUNGE, EQUITES SURGE ON FED PIVOT

WORLD MARKETS

Treasury yields tumbled and most of the world equity indices surged in the week gone by after the Federal Reserve on Wednesday admitted that its efforts to tamp down inflation are taking hold, and indicated three interest rate cuts are coming in 2024.

For the week, U.S. indices gained 2.5%-2.9%, extending the winning streak to seventh straight week. Dow hit fresh record high while S & P 500 and Nasdaq scaled highest levels after January 2022. In

Europe, FTSE and CAC rose 0.3% and 0.9% respectively while DAX was little changed. In Asia, Hang Seng, Nifty and Nikkei climbed between 2-3% while Shanghai was down 0.9%. U.S. 10-year treasury yields fell 32 bps to 3.914% for their worst week since March. Dollar index fell 1.3% to 102.59.

Now let's have a look at the week's developments day-by-day.

On Monday, Dow and S & P 500 gained 0.4% each to close at their highest level since January 2022 and March 2022 respectively. Nasdaq inched up 0.2%.

On Tuesday, Dow and S & P 500 rose half a percent each while Nasdaq gained 0.7%, all three extending the winning streak to fourth consecutive day. Markets parsed the latest inflation numbers and braced for the Federal Reserve’s last interest rate decision. November CPI inched up 0.1% from the prior month as against expectation of a flat reading. Y-o-Y rise of 3.1% was in line with expectations. Core CPI, which excludes volatile food and energy prices, rose 0.3% from the prior month and 4% on the year, both matching estimates.

On Wednesday, U.S. indices surged 1.4% each with Dow hitting a record high after Federal Reserve laid out the timeline for cuts in 2024 and beyond.

Fed held the benchmark overnight borrowing rate steady in the 5.25% to 5.5% range as expected, but more importantly it forecast three rate cuts in 2024, which were more than it had previously indicated. Fed also cut the forecasts for the core personal consumption expenditures price index — it's favored inflation gauge— to 2.4% in 2024 and 2.2% in 2025, down from 2.6% and 2.3% respectively in its previous forecasts. U.S. producer price index was unchanged for November, against the estimate for a 0.1% increase.

On Thursday, U.S. indices gained 0.2%-0.4% as the 10-year Treasury tumbled below 4% and retail sales surprised on the upside. Retail sales rose 0.3% in November from October, when sales fell 0.2%. Sales were expected to decline again.

On Friday, Dow and Nasdaq rose 0.2% and 0.4% respectively while S & P 500 was little changed. New York Fed President John Williams pushed back against the market’s rate cut expectations saying that “we aren’t really talking about rate cuts right now” at the Fed and it’s “premature” to speculate about them. A New York Federal Reserve Bank manufacturing survey showed a third month of declines in new orders.

The European Central Bank held interest rates steady for the second meeting in a row, as it revised its growth forecasts lower. The Bank of England also kept its main interest rate unchanged at 5.25% and said monetary policy is “likely to need to be restrictive for an extended period of time.”

China's November CPI fell 0.5% y-o-y, more than the 0.1% drop expected and the fastest slide since November 2020. The producer price index fell 3% y-o-y, compared with October’s 2.6% drop and expectations of a 2.8% decline. It also marked the 14th straight month of PPI decline and the quickest since August. China posted its biggest industrial output expansion since February 2022 in November, though retail sales growth underwhelmed expectations.

AT HOME

There was no stopping for Dalal Street bulls as Nifty surged 2.3%, extending the winning streak to seventh consecutive week and hitting fresh record highs. Nifty mid-cap and small-cap indices gained 2.7% and 3.4% respectively, both hitting fresh record highs as well. Except 0.3% and 0.04% lower Consumer Durables and Healthcare indices respectively, all the NSE sectoral indices ended higher, with IT and PSU Bank indices on the top, up 7.2% and 5.2% respectively.

India's retail inflation accelerated to 5.55% in November from 4.87% in October. Core CPI however eased to 4.1% from 4.3%. November WPI inflation came in at 0.26% as against -0.52% in the previous month. Core WPI stood at negative 0.4% Vs -1.0%. Industrial output grew at 11.7% in October, the highest in 16-months. India's November trade deficit fell to $20.58 bn vs $31.46 bn month-on-month and $22.06 bn Y-o-Y. Exports fell 2.8% y-o-y to $33.90 bn while imports fell 4.3% to $54.45 bn.

FIIs net bought stocks, index futures and stock futures worth Rs 21474 cr, 1396 cr and 858 cr respectively. DIIs were net sellers to the tune of Rs 2774 cr.

FIIs net bought stocks, index futures and stock futures worth Rs 17433 cr, 2237 cr and 10869 cr respectively. DIIs were net buyers to the tune of Rs 5382 cr.

OUTLOOK

The rally this week was on the back of an unexpected dovish pivot from the Federal Reserve, which made bond yields crash. Narrative of resilient growth too has boosted the sentiment.

In this light, markets will continue to monitor comments from various Fed officials as well as economic data for further cues on above two factors.

Economic data to watch out from the U.S. include November Housing Starts and Building Permits on Tuesday, November Existing Home Sales and December Consumer Confidence on Wednesday, Q3 GDP, Weekly jobless claims and Philly Fed manufacturing index on Thursday and finally November Durable Goods orders, November New Home Sales and December Michigan Consumer Sentiment index on Friday.

Economic data to eye from Europe include Germen Ifo Business Climate index for December on Monday, Eurozone November CPI on Tuesday, UK November CPI, German November PPI and Gfk German consumer climate for January on Wednesday and finally UK Q3 GDP, November retail sales data on Friday.

In China, Peoples' Bank of China will review Loan Prime Rate on Wednesday.

In the absence of any major economic data, Indian markets will track global cues and fund flows for further direction.

Minutes of the latest Monetary Policy Committee meeting will be out on Friday.

Taking cues from the charts, 21600, around which upper end of a rising channel formation made by adjoining tops and bottoms since June 2022 is placed, is the next upside target to eye. Above 21600, Nifty will head to next major target of 22000. 21070 is the immediate support on the hourly chart, upon breach of which, 20770, the bottom made during the week, would be next downside level to eye. Meanwhile, trading longs can be held on to with the stop-loss of 21070.