Why Nifty and Sensex touched new highs on Thursday

At a time when the US is still worried about inflation, the UK is concerned about recession and China about the resurgence of COVID; Indian markets have touched new highs. One can argue that stock markets are a lead indicator, but it is still rather gratifying to note that the stock markets are giving positive returns at a time when global headwinds are still prominent. Over the last one month since the close of October, the Nifty has gained 2.78% and the Sensex has gained 2.55%. That may not look like sterling returns for the indices in a month, but the bottom line is that both the Nifty and the Sensex closed at all-time highs.

Data Source: BSE and NSE

The growth in the Nifty and the Sensex in the last one month has bene consistent with the Nifty also making new highs on 25ths November while the Sensex high is a tad short of its new high. It is not just the closing price that has touched a new high but even the highs have touched a new high indicating that the undertone is very strong. That brings us to the fundamental question; what has triggered this sharp rally in the indices.?

Big triggers for index at new highs

There have been several triggers for the Nifty and the Sensex to touch new highs. Here are a few key drivers covered.

1. The biggest trigger came from the slightly sobered and toned down Fed minutes announced on 23rd November. In a sense, that was the game changer. Not much changed in the tonality of the Fed as it continued to hint at further rate hikes and higher inflation sustaining. However, the Fed also highlighted that going ahead its quantum of rate hikes would be slower than before. Markets are building in 50 bps rate hike in December Fed meet and smaller hikes of 25 bps on few occasions after that.
    

2. In the Indian context, specifically, you must give full credit to the financial services stocks, especially the PSU banks that have been in the midst of a relentless rally. For instance, the PSU banking index not only touched a 52-week high but rallied more than 80% from the lows of the year. Stocks like Union Bank and Indian Bank have rallied over 100% from the lows. The month of November alone generated returns of 35% on the PSU banking index. Financials accounted for nearly 43% of the total profits of India Inc in the Q2FY23, and that has been a key sentiment driver for the markets at new highs.
    

3. Even technically the above two factors resulted in a lot of shorts getting wound up and the rush to cover shorts also resulted in a sharp spike in the index levels. Clearly, with the rising tide of optimism in the markets, traders did not want to risk being on the short side. That also contributed technically to the rally.
    

4. It was a dollar reversal story for the market. In the last few months, the strength of the dollar and the consequent weakness in the rupee had taken its toll on the markets. FPIs have been infusing funds into India with a higher degree of confidence for this very reason. With the rupee bottoming out, at least that is what it looks like, FPIs are looking to make a double bargain on stock appreciation and also on rupee appreciation. That perception was also helped with the US 10-year treasury bond yields falling to 3.69%
    

5. For India, the crude prices have held the key. Crude prices have now softened from the peak of $130/bbl in the Brent market in April 2022 to a low of $84/bbl in November 2022. That is a huge saving for India in terms of the import bill and will help to keep the trade deficit in check. That has also helped market sentiments

Broadly, the asset allocation logic appears to be moving towards risk-on and that is surely helping equities; at least for now.