Market Outlook: Q2 Results, Global Cues, and FII Outflows Set the Stage for Next Week's Key Triggers

The financial markets are set for a pivotal week ahead, where performance will hinge on several impactful factors. Experts anticipate that the release of July-September quarter results for the fiscal year 2024-25 (Q2FY25) will be a significant determinant, alongside the scheduled monthly derivatives expiry, fluctuations in foreign institutional investments (FIIs), ongoing geopolitical tensions, updates on the US Presidential election, and both domestic and global macroeconomic indicators. This amalgamation of events is expected to influence investor sentiment and drive the direction of benchmark indices in the days to come.

Recent Market Performance Recap

In the previous week, Indian benchmark indices experienced a notable drop, attributed to widespread selling across sectors. Both foreign and retail investors engaged in profit booking, a trend further compounded by lackluster earnings reports, a softened demand environment, heightened margin pressures, and conservative business guidance from various companies. Consequently, the Nifty 50 index closed with a significant 2.71% drop, settling at 24,180, while the Sensex experienced a 2.24% decrease, concluding at 79,402.

Foreign Institutional Investors (FIIs), who play a vital role in market liquidity and sentiment, recorded considerable outflows of around Rs 1 lakh crore in October alone. In contrast, Domestic Institutional Investors (DIIs) acted as a counterbalance by purchasing equities valued at approximately Rs 97,000 crore, supporting the market against the adverse effects of FII sell-offs.

Technical Analysis and Key Levels to Watch

Santosh Meena, Head of Research at Swastika Investmart, highlighted that the NSE benchmark index has recently broken down from a significant head-and-shoulders pattern. This technical breakdown raises the probability of testing its 200-day moving average (DMA), which is currently around the 23,400 mark. For the coming week, he noted that the immediate support for Nifty is situated at the 24,000-23,900 range, with resistance levels expected between 24,600-24,700. A sustained move above the 25,000 mark would act as a substantial barrier on the upside, marking a positive trend reversal if breached.

In terms of sector-specific performance, the Bank Nifty index has seen considerable downside, losing over 7.5% from its all-time highs. This sectoral index closed 2.51% lower last week, dropping below the critical 51,100 mark, which aligns with the 21-week exponential moving average (EMA). According to Palka Arora Chopra, Director of Master Capital Services, this downward movement reflects amplified selling pressure following disappointing Q2FY25 results from key banking players such as Kotak Bank, AU Bank, and IndusInd Bank. For Bank Nifty, Chopra emphasized that the immediate support level rests at 50,200. If breached, the decline may extend to the next critical support level at 49,600.

Outlook for Domestic and Foreign Institutional Investors

While DIIs have been actively investing in the market and providing some degree of stability, the broader market direction appears largely tethered to FII flows. The elevated FII sell-offs reflect a cautious stance likely due to macroeconomic uncertainties, interest rate dynamics, and geopolitical tensions. This trend of FII outflows could persist unless market conditions stabilize or signs of growth improvement emerge, underscoring the importance of monitoring FII activities in the week ahead.

Chopra further commented that DII support, although significant, might not entirely offset the outflows if FIIs continue withdrawing capital. Thus, the direction of FIIs could act as a key driver of near-term market movement. In addition, any surprise corporate earnings reports, coupled with global economic and political developments, could act as catalysts, influencing both domestic and international investor behavior.

Key Global and Domestic Influences: What to Watch

1. Q2FY25 Earnings Reports: Investors will be closely watching the next batch of earnings reports for potential indications of growth or continued strain in profit margins. Companies’ guidance and forward-looking statements will also offer critical insights, particularly given the existing demand constraints and cost pressures.

2. Derivatives Expiry: The monthly derivatives expiry, scheduled for the upcoming week, is likely to induce market volatility. Expiries often lead to increased trading volumes as investors roll over or adjust their positions, adding another layer of unpredictability to market movements.

3. FII Trends and Geopolitical Tensions: Foreign investment flows and geopolitical tensions are interlinked factors that could impact market sentiment. As geopolitical uncertainties continue, particularly regarding major global economies and sensitive political issues, FII movements may remain cautious, potentially exerting downward pressure on equity markets.

4. US Presidential Election Polls and Macroeconomic Data: Global markets, including India, are keeping a close watch on the US Presidential election poll updates. Additionally, key macroeconomic data releases, such as inflation and employment reports, from both the US and other leading economies could play an influential role in setting the market’s tone for the upcoming week.

5. Domestic Economic Indicators: India’s own macroeconomic data releases, particularly concerning industrial output, inflation, and trade balances, will provide additional context. Any signs of strength or weakness in these metrics could influence investor sentiment and help guide expectations for future central bank actions.

Conclusion: A Delicate Balance of Influences

As we approach a highly active week, the interplay between domestic and international factors will likely create a dynamic environment for the Indian stock markets. While DIIs continue to lend support, the persistence of FII outflows remains a critical concern. Market direction may hinge on the balance of these institutional flows, corporate earnings outcomes, and the broader global political landscape.

Investors are advised to stay vigilant and adopt a cautious approach, given the volatility expected in the days ahead. The technical levels on key indices and specific sectoral benchmarks will offer a directional guide for market participants. Furthermore, macroeconomic indicators and geopolitical events will continue to be focal points, offering insights into potential risks and opportunities in this complex market scenario.