Market outlook: Are the markets forgetting the risk of a third wave?

On Aug 21, 2021

The domestic equity market has been trading at new lifetime highs since the past couple of days, mirroring the global market indices, which too are moving at their peak levels. But mid-week, developed markets showed signs of sluggishness, especially after the Fed minutes confirmed likely tapering, July retail sales data in the US came in below expectation and China reported sub-level growth rates for July.

Usually, India dances to their tunes, but maintained a relatively stable stance this time, as the worst-hit industries witnessed a recovery in July amid the pandemic. July retail sales came in at 72% of the pre-pandemic levels, 61% more passengers took to the skies compared with June and the hospitality industry witnessed increased occupancy. Even Nomura’s India business resumption index crossed the 100 mark for the first time after dipping in March 2020 and settled at 101.2 levels.

With recovery on in full swing in the worst impacted sectors, what remains to be seen is if India continues to maintain the current level of commercial momentum to further drive this market rally.

The resurgence of Covid-19 variant, especially in China and the US, raises one key question – have Indian investors turned a deaf ear to the probable impact of a third wave? With every 52-week high we make and daily rise in Covid cases across the globe, the above question comes back again and again. Investors must not forget that while markets tend to move upwards, only one negative news can cause a correction with double the intensity, eroding investor’s capital in a jiffy. Do not underestimate the market and keep in mind that the risks of a third wave are real. Although the pace of industrial recovery and the vaccination drive are rising, the ultimate dictator would be the intensity of the third wave and how investors react to it when and if it happens.

Event of the week
Crude

surged 48% in the first half of the year, but there is an 11% correction in Brent price since the start of August. The main reason being a rampant spread of the variant worldwide, causing mobility restrictions and affecting demand, amid an increase in output to 4,00,000 barrels a day by the OPEC+ starting August. Crude oil futures on MCX have seen a dip, as traders trimmed their position amid a weak spot demand. Unless there are secular signs of economies moving back to normal, crude prices are likely to remain under pressure.

Technical Outlook
Nifty50 index closed mildly negative for the week and formed a Shooting Star candlestick pattern, which is a bearish sign. While Nifty has been outperforming major developed and emerging market indices, a Shooting Star candle hints at a mild retracement towards the short-term averages. There could be a dip to 16,150 level. We suggest traders to maintain caution going forward and remain watchful of how the index reacts to the 16,150 level, as any break below the same might lead to weakness in the short term.

ET CONTRIBUTORS

Expectations for the…