Domestic cues to set the tone

Propelled by FII funds flow, strong global sentiment and expectations of stimulus package for industry; markets logged gains for second consecutive week to close at multi-month highs during the week ended. Benchmark indices the Nifty and the BSE Sensex gained 276 points or 2.43 percent at 11,647.60 and 1,032.59 points or 2.69 percent to close at 39,467.31 respectively. Indices ended the week at the highest closing level since February 26, 2020. Partying along with the frontline indices, the Nifty Midcap and Smallcap indices also rose 2.3 percent and 3.7 percent respectively. It is pertinent to observe that FIIs bought more than Rs 5,000 crore worth of shares.

However, DIIs remained net sellers of over Rs 11,700 crore of shares in August till date including Rs 2,600 crore of selling during the week ended. On the Covid front, the government's test, track and treat approach played a crucial role as the recovery rate increased to 76.58 on Friday (against around 75 percent last week) and even the fatality rate improved to 1.80 percent from over 1.85 percent last week.

Despite rise in number of cases, the progress in Covid-19 vaccine has been one of supporting factors for the market for last couple of months. Reports suggested that the vaccine may be approved by end of this year or initially next year. The CSO will release Q1FY21 GDP data, which measures the final value of finished goods and services within the country, on August 31. Analysts expect GDP growth to contract between -18 percent to negative (-)25.5 percent YoY in April-June.

Among other important macro-economic data points, Fiscal Deficit and Infrastructure Output for July will be released on same day. Manufacturing PMI and Services PMI for August will be announced on Tuesday and Thursday respectively. Foreign exchange reserves for the week ended August 28 will be released on Friday. From the companies that will release their quarterly earnings report card in the coming week, important ones to watch out for would be ONGC, Coal India, NALCO, Bharat Dynamics, Jubilant Food Works and Page Industries.

Heard on the Street: Investors grappling with the shape of the Covid-19 recovery have the same blind spot as they did after the 2008-09 financial crisis: They don't know how inflation works. The Nifty and the Sensex are touching multi-month highs this month despite the devastating impact of the pandemic. Similarly, market expectations of inflation have rebounded to their February levels, just months after hitting a multi-year low. Under the surface, however, investors can't decide how Covid-19 will affect consumer prices. Some dread deflation in an environment of weak demand could bring back the dangerous combination of inflation and unemployment. Signs of higher prices could have a particularly dramatic impact, because inflation is historically associated with the outperformance of lowly valued companies at the expense of growth ones. Bonds would get hammered, even if the RBI is as cautious about raising rates. When lockdowns created massive supply disruptions, many analysts warned about a surge in consumer prices.

After official data showed the opposite, the explanation typically given was that demand had weakened even more than supply. The idea that inflation is a result of prices moving to align supply with demand, rooted in Economics textbooks, is an unhelpful one. To be sure, commodity prices are still broadly driven by supply and demand, and part of their cost is passed through. Some firms, such as large retailers, also slash prices after sudden economic downturns because they need to get rid of inventories.

These two factors explain why inflation was low in April / May. Headline inflation numbers have lost meaning as the prices of goods have decoupled from one another. Education and medical-care costs have more than doubled over 20 years, whereas the prices of furnishings, apparel and communication devices have fallen. The implications are powerful: Weak price growth doesn't need to reflect a weak economy, nor does a pickup in activity necessarily trigger inflation. Even if activist fiscal policy is here to stay and fosters an economic revival, RBI may still have discretion to leave rates at today's low levels. Investors can have legitimate concerns about the heady valuations some of the stocks are commanding now. But if anything puts a dent in their portfolio, it won't be GOI's next stimulus package.

F&O / SECTOR WATCH

The settlement week witnessed brisk trading in the derivative segment. Rollovers were in line with last three months averages. Option data indicates a shift in trading range of the Nifty to the higher side with 12,000 strike having a maximum Call open interest of 21.97 lakh contracts, which could act as crucial resistance. Maximum Call writing was seen at 12,000 and 11,900 strikes, while Put writing was seen at 11,600 and 11,300 strikes. Stock futures looking good are Bajaj Finance, Kotak Bank, Federal Bank, L&T, Piramal Enterprises, PNB, Shriram Transport Finance and Zee Entertainment.

(The author is a stock market expert. He is former vice chairman of AP Planning Board)