It’s a deadlock between Bulls & Bears! Book profit in metals on every rise

While there was yet another week of whipsaws in the market, but the broader market sentiment remained directionless in the absence of any significant macroeconomic development.

The benchmark equity indices remained more or less rangebound because of the confidence over India’s growth, which balanced out the uncertainty around the third Covid wave. And rightly so. India has witnessed an increase in forex reserves to $608 billion, which can provide some comfort.

This reinstates the recent FPI’s bullishness in India, which was clearly visible in Nifty50’s P/E trading at 30.6 times, a 25% premium to its five-year average compared with the MSCI Emerging Index TTM P/E of 16.8 times.

Markets have largely remained undeterred in their rise despite rising concerns around the headline and core inflation. While equities continued their joyride, a different narrative is doing the rounds in the commodity space. The rally in metals, which started back in 2020, has come to a halt.

Talks from the Chinese authorities are hinting at inflationary control measures and US’ hawkish stance on interest rates is causing a retracement in metal prices. Now, if the letting off of the steam is just a minor hiccup in a supercycle or it is way past the top is a question up for deliberation. But one thing is clear, the sharp growth in commodity prices might not continue at the same pace going forward.

Investors can, therefore, maintain a wait and watch approach and instead of relying on the commodity price movements, it would be essential to observe the deleveraging unfold on company balance sheets. The utilisation of capital and free cashflow trend over the next few months will help filter the strongest from the ordinary. Part profit booking can be considered on the next leg of bounce in metals stocks.

Event of the Week

This week gone by marked the fifth consecutive rise in oil futures, a 13.5% rise from over a month ago. Oil prices hitting multi-year highs can be attributed to a few distinct influences. First, global demand for oil is expected to reach pre-Covid levels by Q3FY22, as economies open up driven by a pickup in mobility in the US and Europe.

Secondly, after the FOMC meet, the dollar gave up some strength, which helped commodity prices, especially crude. Additionally, the lack of investment by global oil majors in new capacity due to reforms around ESG, can also cause a supply scarcity leading to a further uptick in crude prices. Traders betting on oil are advised to keep a trailing stop loss in place before betting on higher prices.

Technical Outlook

Nifty50 has been trading sideways for almost three weeks now. It seems to be facing a temporary halt after a period of outperformance. Overall market sentiments in global indices look positive, and eventually, Nifty is also likely to catch up. After a strong bounceback from 15,450 level, this zone is now being established as a crucial short-term support. We advise traders to maintain a bullish bias on the market and remain watchful for any break of the crucial support, as this would lead to weakness in the short term.

Expectations for the Week

The domestic bourses are likely to move in tandem with the global indices in the coming week. In order to gauge the revival of sentiment at the ground level, market participants would have their focus on June auto sales numbers. The market is pricing in a strong rebound in volumes this month on expectations of pentup demand from April, May owing to accelerated vaccination drives throughout the country, a strong line-up of launches, all-time low auto loan rates and a favourable monsoon.

Investors are advised to closely watch the unlock theme stocks, as they could see knee-jerk reactions depending on the development in the delta variant. Nifty50 closed the week at 15,860, up 1.13 per cent.