Is the domestic equity market caught in commodity crossfire?

Equity markets globally witnessed an action-packed week because of the underlying pressure from Commodities, which have been experiencing rapid price swings since last year.

It began with the price of WTI crude turning negative for the first time in history in April 2020. The equation has now turned 180 degrees, with oil prices hitting their highest levels since November 2014 after Opec+ decided to stick to their planned output.

Even natural gas prices soared, with no relief for coal either, which too climbed to record highs, leaving the nation to grapple with shortages. This spiralled into an energy crunch, setting up a domino effect. Metals, especially steel, which has already run up, may now see a further price hike due to rising costs of energy supplies. Additionally, poor weather conditions and shipping bottlenecks drove upwards prices for cotton, sugar and coffee.

The Bloomberg Commodity Index touched an all-time high this past week. Given the prevalent supply crunch and uncurbed demand, scorching commodity prices are denting growth as well as squeezing margins for companies. And the only way out is to pass on the increased input costs to the end user.

In fact, the commodity-faced automotive, cement and paint companies have already set the ball rolling. Moreover, cooking gas (LPG) price has already been increased by Rs 15 a cylinder while retail prices of petrol and diesel have surged to record levels. And this could be a trend that we expect to increase, going forward as well, which is definitely not healthy for the end consumer.

While rising commodity prices are a boon for a few, their volatility and spillover effects are definitely a bane to many, and parts of the market will face the brunt. The widening gap between demand and supply is keeping investors on the edge, as inflationary pressure can slow down the ongoing recovery.

This also raises concerns, as policymakers may be prompted to look at hiking interest rates earlier than expected to combat the rising inflation. Investors must take note of these aspects while analysing stocks for investment.

Event of the week
RBI’s MPC mirrored FOMC’s tone to keep its benchmark policy rate intact. The accommodative stance on the repo rate is maintained for the eighth straight time, which also derived comfort out of the previous two inflation prints that were below the 6% upper limit. That also led RBI to lower its inflation forecast for FY22 from 5.7% earlier to 5.3% now.

However, this time the committee’s approach appeared to be a textbook one, with liquidity management as the first checkbox on their agenda, followed by an increase in the reverse repo. Going forward, if the Fed’s tone in November turns out to be as is anticipated, December may be the time when RBI would begin to close the gap between the repo and reverse repo rates.

Technical Outlook
After the heightened volatility seen last week, Nifty50 closed positive for the week gone by. The index managed to bounce from the support around the 17,450 level after forming a Doji candle. Although Nifty50 is still overbought, it has not seen any significant correction. Globally too, major indices have started finding support after a mild price and time correction.

In the last one month, the S&P500 index has corrected almost up to 6% and is now finding support around the 4,270 mark. Traders are advised to maintain a bullish bias going ahead, but should remain vigilant for any breach of the newly-established support in the global indices. Any breach may trigger weakness in Nifty too. The support and resistance levels are now placed at the 17,500 and 18,050 levels.

Expectations for the week

The September quarter earnings season is set to begin next week with largecap IT companies scheduled to report their numbers first. IT stocks in India have been witnessing a strong uptrend over the past couple of weeks, driven by expectations of a rampup in deals and strong hiring, which might continue the growth momentum.

Further, a depreciation in the rupee has played its part in keeping the IT stocks in the green. But macro

data on September CPI inflation, manufacturing and industrial production can dictate the index price for most of the week, as the market continues to consolidate in a tight range.

Nifty50 closed the week at 17,895, up 2.07 per cent.

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