Markets

Year-end liquidity woes to keep markets on a tight leash

Market continued to trade negatively throughout the week. Despite favourable IIP and CPI numbers for February, the market seemed to be in no mood to show signs of strength. The fallout of the PNB scam will impact other sections of the economy.

The RBI has decided to scrap LoUs and Letters of Credit. This step will affect credit flows to importers and exporters alike impacting their finances. It will have a cascading impact on growth as investors continue to lose faith in the state-owned banking systems.

Recent observation by the World Bank on India's growth projection at 7.3 per cent and 7.5 per cent for the next two years is not encouraging. The observation is against analysts’ consensus of accelerated growth for Indian corporates. Only time will decide who will be right.

Events of the week
The US has gone ahead with its trade war rhetoric with the announcement of a three-fold hike in the anti-dumping duty on Indian shrimp imports. However, Indian companies are unlikely to be affected as the rising demand provides a strong shield, but the threat of further hikes in import duty will always remain.

The US has further threatened to impose duty on auto and auto ancillaries which, if implemented, will take away the high growth trajectory of some of the Indian companies. A global trade war at the WTO legal forum is likely to begin.

Technical Outlook
The Nifty 50 rebounded from 200 EMA during the previous week, but the bounce was just a dead cat bounce, as expected. We had mentioned in a March 9 note that "ideally, the prices should pull back to the lower trend channel which could be a good shorting point for the traders".

The Nifty 50 indeed bounced to test the lower trend channel thereafter, resuming the downward journey. Prices are likely to fall decisively below the 200 EMA, a sign that doesn't augur well for the bull market.

The market is entering a complex corrective pattern, which should correct the entire rally since demonetisation. No one can predict the length and depth of the correction and how far the correction can go, but only when the correction is over the factum can be verified by observing the volume pattern. Currently, there is no such indication of correction nearing an end. Sell on rise should be strategy for traders.

Expectations for the week
Going forward, the market seems to remain volatile as valuations are expected to come down further to reasonable levels due to liquidity moving out of the system. Also, the financial year-end liquidity pressure will only strength bears' case.

Global headwinds will decide the direction in the short-term. A massive line-up of IPOs and the disinvestment plans of the government will keep the liquidity tight and further create pressure on the stocks in the secondary market.

Selling is also likely to increase as long-term capital gains currently enjoy zero taxation till the current financial year. Additionally, a subdued performance of the BJP in UP bypolls will also have some more side effects.

Investors are advised to stay on the sidelines. The Nifty 50 closed the week at 10,195, down 0.31 per cent.

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