The New Year began on a positive note with the Nifty briefly touching the 8,300 mark and ending the week 0.7 percent higher at 8,244.
Domestic institutions led from the front, but sentiment was dented after opposition lawmakers demanded postponement of the Union Budget fearing it could influence voters in upcoming state elections.
Reports of a reintroduction of a bill in the U.S. to curb the use of H-1B visas also played a role in puncturing the rally.
Housing finance and real estate stocks were in focus after the prime minister announced various home loan interest subvention schemes for lower income categories.
December saw two-wheeler sales drop by 20 percent on a yearly basis as the full effects of demonetisation began to show. Passenger vehicle sales declined by around 4 percent, with a clear divide between companies having a “waiting list” and those whose products were “off the shelf”.
On the macro front, manufacturing PMI fell to 49.60 in December from 52.30 in November - the first contraction since December 2015, as output and new orders fell due to the country’s cash crunch.
Services PMI was little changed at 46.80 in December.
The Election Commission announced dates for assembly elections in five States – Uttar Pradesh, Punjab, Goa, Manipur and Uttarakhand - starting February 4, with counting of votes on March 11. These elections are also seen as a referendum on demonetisation.
India’s advance GDP data, released early due to the advancement of the Union Budget, indicates that the economy will likely grow at 7.1 percent in 2016-17, as against the previous year’s 7.6 percent expansion.
One may recall that rating agencies have also cut their GDP estimates for India in anticipation of a temporary disruption in economic activity during Q3 because of the government’s decision to ban large-denomination bank notes. While Fitch Ratings lowered India’s GDP growth forecast for this fiscal to 6.9 percent from an earlier 7.4 percent, India Ratings and Research revised its growth forecast to 6.8 percent, well below its earlier projection of 7.8 percent.
On the global front, China's Caixin Manufacturing PMI rose 51.9 in December on the back of increased demand, compared to 50.9 in November. Activity in China's service sector also expanded at a faster pace - the Caixin China services PMI rose to 53.4 in December from 53.1 in November.
U.S. manufacturing posted a fourth straight month of expansion in December as new orders and output jumped.
In the coming week, markets are initially expected to react to the outcome of the crucial U.S. non-farm payrolls data for December. The headline figure disappointed with 156,000 jobs added in December against an expected number of 175,000. However, wage growth remained a bright spot. Unemployment rate in December rose slightly to 4.7 percent, but the figure was in line with expectations.
Global markets will now focus on Donald Trump’s formal inauguration as the new American president on January 20. U.S. indices have been touching new highs led by Trump’s promise of pushing growth, increased fiscal spending, lower corporate taxes and financial deregulation. As a result, the dollar has also risen sharply while gold has plunged.
If Trump fails to deliver, U.S equity markets will be at risk of correcting from the current highs. Sentiments can drive markets crazy till reality dawns, and we have seen that closer home in 2014-15.
The next trigger for Indian markets will be corporate results, which start in the coming week. For IT companies, Q3 is a seasonally weak quarter and the challenging business environment has been further impacted by cross-currency headwinds and project-specific issues. The impact of demonetisation on corporate performance will also be clearly visible.
The upcoming Union Budget holds a lot of promise with expectations that the government will announce various populist measures, especially on the taxation and housing front. The finance minister is also likely to announce a timeline for the GST in his budget speech.
On the macro front, IIP data for November will be released after market hours on Thursday. It fell 1.9 percent in October, following a 0.7 percent growth in the previous month. The government will also announce retail inflation data for December.
Markets are trying to inch up but we are also witnessing profit booking at higher levels. However, the risk of postponement of the Union Budget due to opposition demand may put a temporary pause on the current rally. Nonetheless, any correction will warrant an increase in overall equity exposure given the current environment of low interest rates and expected boosters to the economy in the upcoming budget. We could be heading for a multi-year bull run.