What’s really driving up the equity markets? It’s not just liquidity

After a record sprint, the domestic equity market seemed to be catching its breath this past week. A miss on the US jobs data, while a little worrisome, will most likely mellow down any tapering talks for the time being. However, it is the continued policy support which will drive the performance of equity bourses globally.

And this baton of positive sentiment has been passed on to the Indian indices as well. While a number of macros and micros have been adding tailwinds to the rally, the current investor optimism seems to be more demand led. Last year, markets were driven by savings on the cost side, but now the enthusiasm is more of a demand pull. With each passing day, the narrative is building up around diminishing inventories and higher order wins. Across industries, be it auto where supply is curbed due to the semiconductor shortage or real estate which is experiencing a significant offtake in inventories due to robust bookings, demand may turn out to be a big aid to margins.

Whether pent-up or no pent-up, demand is demand, and the macros are playing a big role in driving enquiries. Lower mortgage rates and increased affordability are acting as a catalyst for NBFCs and banks, which are seeing strong demand for loans, particularly in the housing segment.

Furthermore, renewed focus on infrastructure spending across the globe is helping keep metal prices and cement utilisations robust. If all the cards play out, it would boil down to a healthy top lines for companies going forward. So this demand-led upcycle is one among many points being factored in by the markets. Hence, the impetus for the bulls to lead.

Event of the week

Commodities are in a similar situation, as prices have continued to rise in a supply-constrained environment. Within base metals, aluminium is facing supply shortage due to the recent coup in Guinea and zinc is witnessing a price hike due to decreased inventory levels. Further, sugar is experiencing scarcity due to a frost in Brazil. Coffee and tea are in a similar soup, because of rising freight costs and container shortages. While there is stronger-than-expected rise in prices, demand for the commodities has risen or largely remained stable. Going forward, investors must keep a close eye on commodities, as they play a key role in pushing inflationary tendencies.

Technical Outlook

After the recent sharp rise, the Nifty50 index has been witnessing a bit of a slowdown around key rising resistance lines. Major global indices also seem to be reverting to their short-term mean. So a mild pullback by the index towards the short-term averages cannot be ruled out. Bank Nifty has again started consolidating around its previous all-time high levels and cannot close decisively above the resistance. This trend continues to be bullish and traders should initiate long positions only around dips to minimise the risk of being capitalised at extreme levels. The immediate support on the downside is now placed at 16,500.

Expectations for the week

After a rapid rally to the 17,400 level and above, the market can experience minor roadblocks in the coming week. The bourses might experience whipsaws on the core US inflation data, in case it strikes a sensitive chord of taper talks. But largely, the wider bullish theme is expected to remain intact with occasional profit taking in overvalued stocks. Investors must, therefore, continue to stay invested in fundamentally sound stocks for the longer horizon.

Nifty50 closed the week at 17,369, up 0.26%.

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