D-Street may see profit booking next week as Fed taper looms

“Nervousness would be seen in the market next week ahead of Federal Reserve meeting, which could provide some indications on when the central bank will start withdrawing its monetary stimulus and start raising interest rates eventually,” said Siddhartha Khemka, Head of Retail Research at Motilal Oswal Financial Services.

Economists expect the US Federal Reserve to announce the tapering of its $120-billion per month asset purchase program, which was started during the onset of the pandemic, at the next meeting. Market participants expect the actual tapering of the asset-buying program to start from December or January.

US Fed chief Jerome Powell at the recent Jackson Hole Symposium said that the US economy had met conditions that may trigger a trimming down of the quantum of bonds buying done by the central bank. However, recent muted inflation data and jobs report amid a surge in the spread of Delta variant have raised the possibility of the central bank deferring its taper decision.

“Given the decent growth and elevated inflation environment in the US we expect the Federal Reserve to announce the QE taper process in November and expect the Fed to raise interest rates twice in late 2022,” ING said in a recent note.

Any announcement of tapering by the Fed could lead to some knee-jerk reaction from the global markets including India. This week the benchmark indices rose over 1 per cent despite closing in the red today.

Against the wind

Indian equities managed to buck the nervousness seen in global markets over economic growth, aided by investor optimism on domestic growth as high-frequency indicators point to a rapidly reopening economy and as acceleration in vaccination against COVID-19 reduces the risk of a severe third wave of the pandemic.

“Normally, India’s bourses are in sync with global bourses but not this time! This divergent behavior may not last long but until then Indian investors can continue to ride their existing positions,” said Samco Securities in a note.

The gains in the market this week were also driven by banks, reopening trades and the real estate sector. Banks, which have largely underperformed the benchmark indices in 2021, have likely seen a breakout move that allowed the Nifty Bank index to touch an all-time high this week.

However, the headlines were dominated by Zee Entertainment Enterprises, Vodafone Idea and Zomato. Zee Entertainment ended the week with gains of 40 per cent on the possibility of a complete revamp of its board in the coming weeks.

Vodafone Idea’s stock jumped 33 per cent after the government announced certain relief measures for the telecom sectors that may give the company a fighting chance at survival.


Looming systemic risk

Next week, the focus will be on the looming debt crisis in China. The possibility that China’s second-largest real estate developer Evergrande may default next week could trigger risk-off sentiment in global equities, said analysts.

Evergrande is the largest high-yield dollar bond issuer in China, accounting for 16 per cent of outstanding notes, according to Bank of America Corp. analysts. Should the company collapse, that alone would push the default rate on the country’s junk dollar bond market to 14 per cent from 3 per cent, they wrote in a note this month.

“In the short term, the market is trading in overbought territory and may witness a small profit booking dip going ahead. The overall positional outlook on the market remains bullish as long as it doesn’t cross 17,500 because a break below the same will put a halt to the ongoing momentum,” Samco Securities said.