The fund flow from FIIs has tracked this weakness into EM equities. While the quantum is still not very high but outflows are seen from most key EM’s during the week. From India, FIIs withdrew over the USD 3000 million.
The Nifty50 find some breather after gaining for five consecutive weeks. During the week, Nifty tested almost 10,800 during the week but finally settled near 10,600.
The activities in index futures remain muted and open interest in Nifty remained almost unchanged during the week. The individual stock performance helped the Nifty and Bank Nifty index to close without sharp cuts. However, the mid cap and small cap index observed selling pressure.
Both mid cap and small cap indices declined by more than 3 percent from their recent highs. We believe extended selling pressure may be seen only if Nifty moves below 10,550 levels.
Otherwise, ongoing consolidation may continue with hurdle around 10,800 levels. The volatility in the Indian markets has remained subdued despite the upcoming Karnataka elections and amid the global headwinds seen in the recent period.
This can keep the markets range bound at higher levels. India VIX has remained below the crucial level of 14 percent and no major weakness in the index is expected till India VIX does not move above these levels.
At the same time, Options activity remain concentrated at 10,500 Put and 10,800 Call where both these strikes seeing the addition of almost 10 lakh shares each during the week.
This suggests a broad Nifty range of 10,500-10,800 for Nifty in the coming sessions. The decline in rupee and sticky bond G-Sec yields could keep sharp recovery in check.
Bank Nifty: Consolidation is likely to continue:
After underperforming the broader indices in the month of April, the Bank Nifty started the May series on an optimistic note with outperformance clearly visible since last week.
Participation continued in private sector banks where HDFC Bank and Kotak Bank provided the cushion and continued to outperform. However, PSU banks remained under pressure post the short covering trend which was seen earlier in April expiry week.
The premiums in the index, however, rose significantly in the last week and it’s near to 70 points. Generally, the follow-up rally is not seen with such high premiums.
However, the open interest in the index has declined marginally indicating short covering is gradually materialising.
In the options segment, 25,300 Put have seen sizeable additions whereas on the Call side 25,700 and 25,800 is the active strikes.
Looking at the contracting IV’s in these strikes as compared with its 7 days averages, we feel the index is likely to remain in range before giving a breakout and moving towards its sizeable Call base of 26,000
The current price ratio (Nifty/Bank Nifty) is been hovering near 2.41 levels. We feel post this consolidation, the index is likely to outperform which will pull the ratio higher towards 2.44 levels. However, the recent low of 2.38 is likely to act as a support in in case of any major selling.
EM’s in a risk-off environment:
Risk environment for EM’s continued to weaken further. Till now most EM’s were grappling with surging bond yields and higher crude prices.
In this week Dollar surge added to the EM woes (in trailing two weeks dollar has surged over 3 percent). This has not only weaken Equity complex (MSCI EM down over 2 percent for the week) but weakness in also seen in MSCI EM currency and Debt segments.
The fund flow from FIIs has tracked this weakness into EM equities. While the quantum is still not very high but outflows are seen from most key EM’s during the week. From India, FIIs withdrew over the USD 3000 million.
In other EM’s outflows of over USD 600 million was seen from Taiwan. Outflows were also seen from South Korea (USD -198 million), Indonesia (USD – 133 million) & Thailand (USD -225 million).
Back in the F&O set up for Nifty and Stocks, FIIs continued with their cautious undertone. There was fresh short in index future to the tune of USD 172 million. The index option buying increased to the USD 580 million
Going ahead, crude, bond yields and US dollar will continue to be the driving force. In the absence of a cool-off in these variables from current elevated levels, risk sentiment may continue to deteriorate as higher yields and dollar have a negative impact on EM risk assets. Crude surge was driven FX devaluation will be the key for EM risk sentiment as many economies have a vulnerable current account situation.
Adding to variables to monitor will include the progress on US-China trade talks & Non-farm payrolls release from the US. In this backdrop, FIIs may continue to refrain from EM risk asset landscape.
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