Fears of 3rd wave of Covid trigger uncertainty

Spooked by US Federal Reserve's hawkish stance, dollar index jumping to a two-month high, modest renewed selling from FIIs and news flow on Adani group; market broke its four-week gaining streak this week to end lower amid muted global cues. The BSE Sensex fell 130.31 points to 52,344.45, and Nifty declined 116 points to 15,683.35 points. The broader markets underperformed benchmark indices, with BSE Midcap and Small-cap indices falling 3 percent and 1.86 percent respectively. Sharp selling was seen in metals, auto, banking, financials, infrastructure, energy and pharma stocks. However, good buying was seen in defensives like IT and FMCG. Short covering in beaten-down stocks curtailed weekly losses.

Sharp fall in new coronavirus cases in the country supported the market. However, fears of third wave of Covid-19 in the next 'six to eight weeks' are resurfacing triggering element of uncertainty. During the week, the Indian rupee depreciated 1.17 percent against the US currency to end at 74.10, largely due to rising oil prices and a stronger US dollar index.

Global markets weakened after the announcement from US Fed official that the first-rate increase can be from late 2022. In the past, especially post-2012, big moves in the US interest rates have seldom translated to changes in Indian equities, with particular cases in point being the 2013 taper tantrum and the recent rise in UST yields. While global liquidity factors (and Fed action) do matter, it is important to keep an eye on factors closer to home, such as RBI action, IGB movements, and household savings.

Overall, the direct linkage between Fed action and Indian equities has been weaker in recent years than in the past. In the week ahead major PSUs like ONGC, Bharat Dynamics, Oil India, Bharat Electronics, NMDC, Mishra Dhatu Nigam, ITI, and SJVN will announce quarterly earnings. Among others, Ashok Leyland, Info Edge India, Sobha, Apollo Hospitals Enterprise, Indraprastha Gas, JSW Energy and Repco Home Finance will also release quarterly numbers.

Heard on the Street: Indian stock market crashes to date were caused due to a variety of reasons like change of ruling parties, actions taken by the government (demonetization), ripple effect of international market crashes and now even pandemics. It may be recalled that as early as in 1982, the bear cartel of Bengal started short selling shares targeted primarily of Reliance. The value of shares decreased significantly. The BSE was shut down for three consecutive days. In 2000, it was the dotcom bubble led by information technology (IT) companies. In 2007, it was started with Reliance Petrochemicals and Reliance Natural Resources in December Huge build-ups in derivatives positions leading to margin calls and that many IPOs had sucked out liquidity from the primary market into the secondary market have considerably weakened markets in 2008. Sharp swings were seen in the market by developments in the Amtek group in 2015. Similarly, it was the turn of large shadow bankers like DHFL, IL&FS, and Indiabulls Housing in 2018-2019.

Quote of the week: In investing, what is comfortable is rarely profitable — Robert Arnott.

At times, you will have to step out of your comfort zone to realize significant gains.

F&O/sector watch

Ahead of the settlement week the derivative segment witnessed heightened intraday volatility. In the options segment, the maximum Call open interest was seen at 16000 strike, followed by 15800 and 16500 strikes, while the maximum Put open interest was seen at 15000 strike, followed by 15500 and 15600 strikes. Call writing was seen at 16000, 16200 and 15700 strikes, with unwinding at 15400 and 15200 strikes. Put writing was seen at 15000, 15200 and 15600 strikes, with unwinding at 16200, 16000 and 15800 strikes. Option data indicated that the Nifty could see a wider trading range of 15,400 to 16,000 levels in coming sessions. Bank Nifty likely to face strong hurdle in zone of 35000-35500. Despite the intraday volatility the Nifty VIX for the week closed at 15.29%. The Implied Volatility (IV) of calls closed at 14.26 per cent, while that for put options closed at 15.32%. PCR of OI for the week closed at 1.07.

Stock futures looking good are ACC, GMR Infra, HUL, HDFC Life, ICICI General, Info Edge (Naukri), SBI and Zee Entertainment. Stock futures looking weak are LIC Hsg, JSW Steel, Powergrid, RBL Bank, and Petronet.

(The author is a stock market expert. He is former vice chairman of AP Planning Board)