Bulls rule as Sensex soars over 500 points; here are 5 factors driving the rally

Dalal Street

Rally in financials and IT stocks, US Fed’s stance on interest rate hikes along with buying among index heavyweights propelled equity markets in India on Thursday. Additionally, investors bet on positive expectations from the Interim Budget 2019 as well.

The Sensex rose nearly 600 points, while the Nifty hit 10,800 in the afternoon trade. Buying was visible across all sectors, with maximum gains seen among banks, technology names as well as energy sector.

The likes of Infosys, GAIL and Kotak Mahindra Bank topped the gainers’ chart.

Here is a list of five factors that are fueling the rally.

Financials, IT stocks rally

Banking stocks have seen a surge during the day’s trade. The Bank Nifty index is up over a percent, and stocks such as Kotak Mahindra Bank, Axis Bank, IndusInd Bank, HDFC Bank and State Bank of India were trading higher by 1-3 percent.

Additionally, stocks in the technology space are soaring in trade, even as rupee showed some appreciation. The rupee touched 70 per US dollar intraday, but came back to 71 per US dollar levels.

The Nifty IT index surged over 1.5 percent with Infosys contributing the maximum gains. The stock rose over 3 percent, while other marquee IT names such as Tech Mahindra, NIIT Technologies, TCS, and Wipro gained between 1-3 percent.

US Federal Reserve stance

The markets reacted to a slight breather in the rate hike cycle by US Federal Reserve. The US central bank signaled that there could be some patience in the pace of hiking interest rates, amid fears of slowdown in US economy.

As it held interest rates steady, the US central bank also discarded its promises of “further gradual increases” in interest rates, and said it would be “patient” before making any further moves.

Fed Chairman Jerome Powell said the case for rate increases had “weakened” in recent weeks, with neither rising inflation nor financial stability considered a risk, and “cross-currents” including slowing growth overseas and the self-inflicted wound of a federal government shutdown making the US outlook less certain.

“We are now facing a somewhat contradictory picture of generally strong US macroeconomic performance alongside growing evidence of cross-currents. Common sense risk management suggests patiently waiting greater clarity,” Powell told reporters after the end of a two-day policy meeting.

Nifty breaks above 10,800: back above 20, 50-days EMA

Indian market witnessed a breakout on the January expiry day and a day ahead of Interim Budget. The S&P BSE Sensex reclaimed 36,000 while the Nifty50 also went above 10,800 levels on intraday basis.

It is now trading well above its crucial short-term moving averages such as 20, 50, 5-days exponential moving averages. However, it is still below 200-days moving average placed at 10,840 on the daily charts.

The bounce back was largely on the back of short covering triggered by US Fed response to future trajectory of rates. The US Central Bank kept rates on hold and said that it will be patient in raising rates further amid global slowdown.

A close above 10,840-10,850 level on Thursday will open room for further upside towards 10,900-11,000 levels. But, February 1 being the Budget day, volatility cannot be ruled out.

“It looks prudent on the part of traders to remain on sideline till the events are cleared out of the way. Technically speaking, strength in indices can be expected on a close above 10756 levels where as weakness shall get accentuated further on a close below 10580 levels with an initial target placed around 10333,” Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, Chartviewindia.in

Budget expectations

Ahead of the Interim Budget to be presented on February 1, 2019, investors are seen placing positive bet on the kind of reforms that could be announced. As such, the buzz of a possible full Budget instead of a vote on account could be played positively by traders in the market.

Additionally, President Ramnath Kovind, in his address to the Parliament, stressed on the government’s focus on doubling rural incomes as well as helping the farming community through various initiatives.

"...As the general elections are just around the corner, the interim budget is the last opportunity for the incumbent government to woo a larger section of the society. It is likely to be more than just a vote-of-account and for now, we expect some alterations to the expenditure schemes. While a package for farmers is almost a given after Mr. Jaitley’s statement to tackle specific agricultural challenges that “can’t afford to wait,” there are also hopes that the government may announce some relief measures on the direct tax front," Suhas Harinarayanan, Head-Institutional Equity Research at JM Financial Institutional Securities told Moneycontrol's Kshitij Anand.

Index heavyweights see buying

The likes of HDFC twins, Reliance Industries, Infosys, Kotak Mahindra Bank and Tata Consultancy Services have witnessed intense buying.

These are index heavyweights and a rally in such names usually boosts equity benchmarks. Apart from Infosys, HDFC Bank and HDFC have surged 2-3 percent, while TCS is up over 1.5 percent.

(With inputs from Reuters and other agencies)