Will Dalal Street extend losses? Key triggers to watch this week

The Indian stock market has reached a significant milestone, with Dalal Street registering losses for eight straight weeks, marking the first time in 25 years that this has occurred. This slump has been exacerbated by a combination of rising oil prices, soaring bond yields, and inflation concerns, which have dampened market sentiment. Analysts are closely monitoring several key triggers that could influence the market's trajectory in the upcoming week.

Oil prices have been relatively stable in recent days, following European leaders' agreement with US President Donald Trump to release diesel reserves. However, there remains considerable uncertainty over the future development of the conflict. JPMorgan analysts noted that many previously assumed economic thresholds set by the US administration have already been surpassed, with no clear exit strategy in sight.

The threat of further supply disruptions due to recent attacks has raised the likelihood of higher oil prices, with Goldman Sachs projecting potential prices of $120 a barrel if attacks intensify. Conversely, a return to normal exports could bring prices back down to around $80 a barrel.

The 10-year US Treasury yield has surged to 5.34%, the highest level since 2002. This increase makes US government bonds more appealing compared to riskier emerging-market assets, potentially prompting global investors to divert funds away from markets like India. This shift can weaken the rupee and exert downward pressure on equities. The weaker currency can also raise the cost of imported goods, particularly for companies reliant on crude oil and other overseas inputs.

Foreign Institutional Investors (FIIs) have been selling shares at an accelerated pace, with a total outflow of Rs 43,687 crore over six trading sessions. The decline in FII index futures long-short ratio to 8.01% represents one of its lowest points in history. Foreign investors' reluctance to repatriate funds, even as the 10-year US bond yields hover around 5.2%, is considered a rational response in the current global interest rate environment.

However, Bernstein's report suggests that sustained foreign inflows are unlikely until India develops globally competitive industries in areas such as semiconductors, batteries, and energy storage.

The second quarter (Q2) earnings of several companies, including TCS and DMart, will be disclosed, providing crucial insights into market sentiment. TCS's results will be scrutinized for revenue growth, deal wins, margins, and management commentary on IT spending, while DMart's numbers will shed light on consumer demand, sales growth, and operating margins.

Any significant deviation from expectations in these earnings reports could sway sentiment not only for the respective stocks but also for the broader IT and consumption segments.

The Indian rupee has weakened to a two-month low, with the currency suffering further pressure due to rising global bond yields, higher oil prices, and increased foreign portfolio outflows. This downward trend has kept exporters cautious about hedging their receivables, despite strong importer hedging. As a result, there is a widening demand-supply mismatch in the foreign exchange market.

IFA Global, an FX advisory firm, advises exporters to hedge cautiously, focusing on in-hand orders, while importers should capitalize on the dollar-rupee pair's dips to mitigate their exposure.

Technical analysts suggest that the Nifty 50 is in a broader corrective phase, marking its eighth consecutive weekly decline. Currently, the index is trading below key moving averages, with a downtrend characterized by lower highs and lower lows. The immediate resistance level is projected to be around 22,500-22,600, followed by 22,800-23,000.

For a near-term stabilization and potential recovery towards the 22,800-23,000 range, the index must successfully surpass the 22,600 barrier. However, to achieve a meaningful improvement in its short-term structure, the index would need to reclaim the 23,000 level.