As the US subprime concerns and its impact on credit markets gripped the entire global markets, liquidity remained tight across the markets.
Last week was a clear indication of the global nature of our markets. As the US subprime concerns and its impact on credit markets gripped the entire global markets, liquidity remained tight across the markets.
World indices across Asia, Europe and Americas corrected sharply. Investors rushed to buy safe-haven government bonds, unwind yen-financed carry trades and moved to scale back expectations for interest-rate hikes by some major central banks this year. The fall was accentuated by a further rise in the yen, which climbed to 112 levels against the US dollar.
The sliding global markets got a life line late on Friday when the US Federal Reserve announced a cut in its discount rate by 50 basis points to 5.75%.
The Indian markets were sensitive to news from global financial markets and slid sharply in line with the sell off. Nifty futures opened at 4321, went below the 4000 level to touch a weekly low of 3953 and closed at 4091.
On a weekly basis, Nifty futures lost over 200 points over the previous week while the Sensex was down 727 points to close at 14141. There were sharp gap down openings with some intraday recovery, but for most part the indices fell sharply.
In the derivatives segment, large hedged and short positions on Nifty futures remained during the week, which was reflected in large discounts to the spot Nifty. The Nifty discount ranged between 15 and 50 points. On Friday, most of the short positions were covered as intraday discounts reduced from 50 points to 8 points.
The open interest remained at over Rs 80,000 crore. Unlike in the previous corrections, the pressure from the F&O margin was not much during this correction as the market participants were cautious.
Volatility was very high, which was reflected in the implied volatility for the August series increasing to 34-38%, indicating edginess among market participants. The Nifty open interest put-call ratio was in the range of 1.20 -1.40.
Most sectors ended in the red but the worst hit were banks, metals, finance and information technology. Stunned by increased volatility, market participants preferred to go slow and reduce their positions.
The most active futures were Nifty, Reliance, RelCapital, Tata Steel, SBI, RCom, Bharati Tel and ICICI Bank.
On the options front, good activity was seen in Nifty 4100 calls, 4200 calls and 4300 calls. Nifty 4100 puts, 4200 puts and 4300 puts also witnessed increased activity in terms of volumes and open interest.
Going ahead, the Fed’s announcement is a positive move for the markets. The domestic indices, along with all other Asian markets, are likely to open higher on Monday. Lot of shorts which still remain uncovered could trigger a sharp pull back.
Once the cascading effect recedes and the global situation stabilises, risk appetite will be re-assessed and fundamentals (and earning prospects) would take over the sentiments. Our domestic growth story coupled with infrastructure push should get the markets back on track with valuations corrected, post dip.
India appears to have a wonderful opportunity to show itself as a superior investment alternative not touched by sub prime woes in the global turmoil. However, this would take some time. The emergency actions by global central banks indicate continued uncertainty and risk aversion in the financial markets.
Greater uncertainty means no one knows where the financial land mines are planted in other parts of the world. For the moment, investors should be watchful and let the global situation play out for a while. It would be appropriate to invest 25-30% investible surplus in large-cap stocks.
Motilal Oswal Securities
info@motilaloswal.com
Disclaimer: The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement.
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