market analysis: Not just bond spike: Why are the markets facing selling pressure?

The domestic equity market behaved contrary to expectations during the week gone by as it decoupled itself from the US indices. While the domestic bourses remained under pressure and signalled caution, the US indices managed to crawl back to make life-time highs. It was indeed the US Fed’s comments that it will not retreat from zero interest rates or its bond purchase plan any time soon, which optically reinstalled confidence.

However, the behaviour of the bond market was starkly opposite. The Fed’s reiteration of its dovish stance puzzled it more instead of defusing the concerns. However, the excitement didn’t last long, and despite an upbeat policy, bond yields spiked along with commodity prices across the globe. This indicates that even good news isn’t cheering the bourses and most of these positives were already factored in.

The domestic market also eventually took cues from the US and showed signs of weakness. India is currently dealing with its own set of macro issues. Number 1 is the fear of a second wave of coronavirus infection. To add to it, rising retail inflation is taking a toll on the market’s sentiment.

Although the number of Indians getting vaccinated is rising, market participants are turning cautious on equities fearing the spike in inflation, rising bond yields and possible lockdowns. FPIs’ continuous buying spree has stalled for a few days this month. All of this points to the weakening of the bull run, which is not able to hold the market. On the contrary, there is more of retail speculative liquidity building in the market. This is visible in the exorbitant amount of funds allocated for the subscription of the six IPOs during the week.

Retail investors poured in huge amounts of money during the week for IPO subscriptions. The market is reflecting caution. Hence those investing with a 5-10 years horizon can hold on to their stocks while medium-term investors can book profit and wait for deeper cuts in the markets before investing again.

Event of the Week
The Union Cabinet’s much awaited DFI Bill was cleared this week with an aim to providing finance exclusively for infrastructure projects. The goal is to attract further investment and lend approximately Rs 5 lakh crore over the next three years. The bill is expected to benefit infrastructure projects with long gestation periods, as the funding will remove any financial hurdle.

This move should go down well for the economy, where infrastructure development is being looked as the cornerstone to bolster a virtuous economic cycle. It is likely that with a strong financial backing, DFIs will be able to ignite the next cycle for the infrastructure sector as a whole.

Technical Outlook
Nifty50 closed the week on a negative note after witnessing selling pressure throughout. The index broke below the 14,450-15,350 range, and if this breakdown sustains in the week ahead, then the market can go even lower. If the market manages to stabilise at the current level, then Nifty can see some consolidation within the said range. Any decisive break from these levels can take the index further down to 14,000 level in the short term.

Traders should keep appropriate stop losses while taking positions, as the market is are currently standing at a critical juncture.

Expectations for the Week
With the rise of Covid-19 cases in India, investors should keep an eye on any development that can impact supply chains of corporates. The bond yield movements should also be observed, as this will dictate the sentiment towards equities in the near term. Domestic market could still witness a slew of IPOs in the coming weeks. No other major events are lined up in the near future.

Investors are advised to keep sufficient liquidity, which can help them take advantage in case any healthy correction comes up before the closure of the financial year. Nifty50 closed the week 1.91% lower at 14,744 level.