Devangshu Datta: Bracing for a breakdown
Festive season notwithstanding, the newsflow for the past fortnight hasn’t been of an order that would inspire much in the way of celebration. It’s been one thing after another and almost all of it has been negative in its financial impact.
Market tends to discount expected information, good or bad. It’s the unexpected that can throw traders out of kilter and move prices suddenly. So, let’s start with the unexpected. Globally, the blow-up in Gaza is unexpected. If it escalates, or if tension remains at present levels for much longer, it will, at some stage, start to impact energy prices. Given that there is a seasonal spike in energy demand due to heating costs in the Northern hemisphere, this could be significant. On general principle, going long on December crude could be a hedge.
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Domestically, the deteriorating health of Bal Thackeray had created tension. It is unknown how his followers, who have a history of violence under similar circumstances, will react to his death on Saturday afternoon. They rioted in 2001 when Thane politician Anand Dighe died of a heart attack. If they impose a bandh in the coming days then, given the financial capital’s history and demography, the fallout from such an event could be severe. It is best to be braced for disruptions in trading.
|Current (Nov 16)||Value |
14 days ago
|Index dividend yield||1.50||1.40||0.10|
|Index Book value||2.97||3.10||-0.13|
|USD INR (RBI ref rate)||54.9915||53.6645||-2.47|
|FII net buys/sales (Nov 1-15)||3348||10,273*|
|DII net buys/sales (Nov 1-15)#||-588.9||-2,549*|
|# Rs crore, *Oct 1-31 net buys/ sales|
In more normal news from around the world, the re-elected US President Barack Obama will have to find coherent, credible ways to tackle the so-called fiscal cliff. How he does this, and what the Republican-dominated House of Representatives lets him do, will naturally be watched with a great deal of interest.
Meanwhile, Europe continues to look fragile as anti-austerity demonstrations rocked several nations. The Economist has also just pointed out that France could be the next domino likening it to a time-bomb. Right or wrong, this could mean a dark-lens-focus on the zone’s second-largest economy .
Back in Delhi, the index of industrial production dipped in September, suggesting that the mild recovery in August had been a false dawn. Inflation stayed high with the consumer index at 9.65 per cent. The point-to-point change in the wholesale price index dropped below eight per cent, which is lower than it’s been for a while, but still too high for anyone’s comfort.
The 2G spectrum auctions bombed. After the government has subsidised BSNL (Bharat Sanchar Nigam Limited) and MTNL (Mahanagar Telephone Nigam Limited), and offset previous license payments, etc, it will receive a pitiful sum. One good thing about this was that share prices in the telecom sector gained. The 2G issue could prove to be a further source of embarrassment for the United Progressive Alliance government in the winter session.
As things stand, it’s unlikely that much in the way of substantive legislation will be passed in that session, and disruptions are likely. However, nobody in the political establishment appears prepared for a general election yet so, it’s likely that the government will survive. The Gujarat Assembly elections could provide a pointer to the Bharatiya Janata Party’s strategy. Modi-supporters hope that it will bring him closer to becoming the official National Democratic Alliance’s prime ministerial candidate. But he’ll need to win big in Gujarat to overcome internal opposition.
On the corporate front, second-quarter results suggest that non-financial sectors have come to terms with the environment. A mix of ruthless cost-cutting and near-moratorium on investments seems to have helped many companies improve margins. But the financial sector seems to be in dire straits, especially the public sector banks. The simmering feud between Reliance and the Comptroller and Auditor General over KG-D6 audits could flare up again.
The dollar strengthened versus the rupee as expected, once US elections ended. More currency volatility is on the cards, given the fiscal cliff. Most traders expect a few sessions of anxiety with, perhaps, a fall in US equity markets and a dip in the dollar’s value against other currencies. Since the US is “too big to fail", eventually some strategy will be cobbled together — and then the dollar may strengthen. The dollar/rupee exchange rate has already hit Rs 55. December could see a snapback till 53.5 or a fall past 56 or both, if things get really entertaining in DC.
In India, trading volumes continue to drop. There’s been no shift in institutional attitude. Foreign institutional investors (FIIs) continue to be net positive. Domestic institutional investors have remained net sellers. Retail and operators have cut back on trading. This is normal in the Diwali period.
But patterns could change on a breakdown. Technically, the index patterns look weaker. The Nifty dropped below 5,600 levels in the latter stages of Friday’s session. It has now developed a pattern of successively falling peaks and lower lows. If this is the early stage of a breakdown, a slide till 5,400 is the likely minimum drawdown.
The post-Diwali period usually sees weak domestic sentiment since people are more interested in buying gold, or consumer durables, or going on holiday rather than building equity portfolios. December also sees a cutback in FII exposures as fund managers start window dressing before financial year-end. FIIs usually take the Christmas-New Year period off.
If this expected absence of demand coincides with unexpected bad news, the market could fall off a cliff. Possibilities for unpleasantness include wrangling over methods to a fiscal cliff in US, sound and fury in the winter session of Parliament, a run on La Bourse in Paris, etc.
The open interest in the Nifty option chains suggest a lot of traders are betting on movements till either 5,200, or 5,900. The possibilities of a breakdown appear far more likely and it could run pretty deep. I’d reiterate my recommendation of deep Nifty puts held till the end of December settlement. There are simply too many events on the calendar that could individually, or in coincidence, push prices lower. The next six weeks could well be the most volatile period of the year.