Sensex falls below 39K; here are 5 factors dragging market

The S&P BSE Sensex plunged over 300 points in the early trade on April 22 dragging itself below 39,000 weighed down by muted global cues, rise in crude oil prices, growth concerns, and mixed March quarter results.

Nifty also slipped below its crucial support at 11,700. For bulls to remain in charge, the index should stay above 11,550.

Here are 5 factors that could be weighing on markets:

Oil hits 5-month peak:

A rise in crude oil was one of the top factors that not only weighed on Indian markets but most of the Asian markets. Oil prices that touched a 5-month peak spiked on reports that the US was likely to ask all importers of Iranian oil to end their purchases or face sanctions.

Reuters in a report said that Brent futures rallied to a five-month high after the Washington Post said US Secretary of State Mike Pompeo will announce “that as of May 2, the State Department will no longer grant sanctions waivers to any country that is currently importing Iranian crude or condensate.”

Brent crude rose roughly 1.7 percent to $73.24 per barrel, highest since Nov. 7, 2018. Crude price rose from $53.80/bbl on December 31 to $74.21/bbl intraday on April 22, an increase of about 38 percent. Experts feel that as long as crude is trading around $70/bbl, the market will remain stable, but a sell-off in equities could be seen if oil breaks past $80/bbl.

A rise in crude oil prices not only leads to an increase in the raw material cost for companies (where it is used as a raw material) but also fuels inflation in the economy, suggest experts.

“A lot of Indian companies depend on healthy crude oil prices, this includes tyre, lubricants, footwear, refining and airline companies whereas oil exploration companies in the country could benefit from a rise in oil prices,” Ritesh Ashar - Chief Strategy Officer - KIFS Trade Capital told Moneycontrol.

“We don’t see any reason to worry at this level for investors. In fact, India has the ability to perform well even at the level where crude price rises till $75/bbl. The real concern for the investors would be near the level of $80/bbl that can be considered as the threshold level which could disrupt macros and hurt earnings,” he said.

Reliance Industries drags Sensex

Quarterly results from Reliance Industries on April 18 were broadly in line with estimates, with refining disappointing a bit, but retail and petrochem doing well. RIL carries one of the highest weight in the index.

But, brokerages remain fairly mixed on RIL. CLSA, Nomura maintained their buy rating while Kotak Institutional Equities maintained its sell while IDBI Capital downgraded the stock to hold.

Investors who are already invested in RIL should remain long on the index as some brokerage remains confident of a strong rally of over 10 percent in the next 12 months.

CLSA was most aggressive target price on RIL of Rs 1,665 for next months which translates into an upside of 20 percent from April 18 close. However, as the view remain mixed, investors should avoid fresh longs, suggest experts.

Kotak Institutional Equities maintained its sell rating on Reliance Industries. The brokerage also maintained its target of Rs 1,100.

The brokerage firm is factoring in lower subscribers/ARPU for Jio. RIL has not incorporated fiber/tower demerger in the P&L yet. Kotak remains concerned about persisting high capex and rising leverage.

IDBI Capital downgraded RIL to hold from a buy earlier but hiked the target price to Rs 1,400 from Rs 1,326. The downgrade is largely on account to price appreciation and limited upside. The brokerage firm hiked target to reflect FY21 estimates.

RBI minutes signal growth concerns

The Reserve Bank of India (RBI) Governor Shaktikanta Das stressed on the need to support economic growth and said inflation was likely to be lower than projected, as he voted for a rate cut in the April Monetary Policy Committee (MPC) review meeting.

"Investment demand is losing traction and a deceleration in exports may further impact investment activity," Das said. "With the inflation outlook looking benign and headline inflation expected to remain below target in the current year, it becomes necessary to address the challenges to the sustained growth of the Indian economy."

The RBI, on April 18, released the minutes of the three-day MPC review meeting that was held on April 2-4. In its first bi-monthly policy review this FY, the MPC voted 4-2 for a 25 basis points rate cut. This was RBI's second consecutive rate cut since February policy.

Sell-off in financials: NiftyBank below 30,000

Financials remained under pressure in trade with NiftyBank slipping below 30,000 in the morning trade, largely weighed down by losses in Yes Bank, IndusInd Bank, Axis Bank, Federal Bank, and Kotak Mahindra Bank.

Bank Nifty made a lifetime high of 30,669 last week but failed to hold above 30,500 and drifted sharply towards 30,150.

It erased the gains of the previous day and formed a Bearish Engulfing pattern on the daily scale and negated it higher highs - higher lows formation after three sessions on April 18.

“The index has to continue to hold above 30,000 to attract buying interest towards its lifetime high of 30,669, while on the downside major support is seen at 29,650,” Chandan Taparia, derivative & technical analyst at Motilal Oswal Securities told Moneycontrol.

Technical Factors:

Nifty saw a cut of over 100 points in the trade that pushed the index below 11,700. The index made a lifetime high of 11,856 last week but failed to hold its gains and drifted towards 11,740.

It formed a Bearish Belt Hold or a Dark Cloud Cover pattern on a daily scale and a small bullish candle on a weekly scale.

For the week, Nifty would face hurdle at 11,856 as it is a climatic top for the market. If Nifty fails to climb above 11,856, it would drag the sentiment in the short term and could push indices to 11,700-11,690, where the market had left an exhaustion gap," Shrikant Chouhan, senior VP (Technical Research), Kotak Securities.

"For positional and medium-term traders (1 to 3 months), investors’ strategy should be to buy at each major support viz. 11,700 and 11,650 with a final stop loss at 11,600 on a closing basis," he said.

Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.