Volatile trading likely amid global uncertainty

Spooked by weak global sentiment, continued rout in Adani group stocks, hawkish tone seen in the minutes of US Fed and RBI MPC; the benchmark indices snapped their three-week gaining streak and posted weekly losses of more than two per cent during the week ended. It is pertinent observe that the Nifty fell for six consecutive sessions and ended at its lowest levels in the last four months. BSE Sensex fell more than 1,500 points to close at 59,464, while NSE Nifty lost 478 points to settle at 17,466, the lowest closing level since October 17 last year, wiping out all previous three-week’s gains.

The broader markets also traded under pressure with Nifty Mid-cap and Small-cap indices declining 1.8 percent and two percent respectively. Though the pace of selling by the FIIs has slowed down from January, the week ended witnessed renewed selling to the tune of Rs3,100 crore. Concerns around interest rate hikes in the US saw bond yields rising and the dollar strengthening. So far in February, the dollar index has gained three per cent. India’s forex reserves have seen fall for third consecutive week, coming in at $561.267 billion for week ended February 17, down by $5.681 billion compared to previous week. The carnage witnessed in Adani Group stocks can be understood by the fact that to retest their 52-week highs, the stocks have to rally by 61 per cent to 527 per cent from current levels. ACC (61%), Ambuja Cements (73%), Adani Ports (77%), Adani Wilmar (100%), ND TV (186%), Adani Enterprises (218%), Adani Power (300%), Adani Total Gas (413%), Adani Transmission (496%) and Adani Green (527%). Fears of El Nino effect are on the radar. However, observers say that weather anomalies will prove transient and India may have a normal monsoon.

Statement of RBI MPC member Jayanth R Varmathat India’s economic growth appears to be ‘very fragile’ and it may fall short of what the country needs to meet the aspirations of its growing workforce has raised fears of mild economic slowdown. Analysts expect inflation to remain high in 2022-23, but come down significantly in 2023-24. Near term direction of the markets will be dictated by macroeconomic data (fiscal deficit and infrastructure output numbers for January will be released on February 28, while on March 1, we will have S&P Global Manufacturing PMI data for February), monthly auto sales numbers, advance reports on Monsoon, rupee-dollar movement and global cues. With global uncertainty, volatility is likely to remain on the higher side. Traders can expect stock-specific moves in upcoming week with bias likely to remain in favour of bears.

Listening Post: Stocks and bonds slumped in 2022 after central banks raised interest rates at a rapid pace to try to rein in inflation. But Warren Buffett retained his sense of optimism in his annual letter to investors last week, saying he continues to believe in the resilience of the US economy. Buffett, widely regarded as one of the world’s top investors, has been publishing the letters for more than half a century. Over that time, he hasn’t just reflected on the past year for his company, Berkshire Hathaway Inc, but also shared his thoughts on everything from esoteric accounting rules to his aversion to excessive risk-taking. Buffett clearly said that he would refrain from basing their decisions on where they think interest rates, oil prices, or other factors that affect markets will be in a year’s time. Though economists, politicians and many of the public have opinions about the consequences of that huge imbalance, Buffett pleads ignorance and firmly believes that near-term economic and market forecasts are worse than useless. Investment in any company would be in a manner that will achieve an acceptable result over time and that will preserve the company’s unmatched staying power when financial panics or severe worldwide recessions occur. Although critics of buybacks contend that companies would be better off investing that money into their businesses, proponents, like Buffett, say they can benefit shareholders if they are executed when a company’s share price is trading below its value. Buffett holds that operating earnings are a better reflection of how a company is doing, since accounting rules require the company to include unrealized gains and losses from its other investments in its net income. Volatile markets can make a company’s net income change substantially from quarter to quarter, regardless of how its underlying businesses are doing. Buffett says that a company’s quarter-by-quarter gyrations, regularly and mindlessly headlined by media, totally misinform investors and urge investors to focus instead on operating earnings.

Quote of the week: The secret of making something work in your life, is first of all, the deep desire to make it work; then the faith to make it work; then to hold a clear definite vision in your consciousness and see it working out step-by-step, without one thought of doubt or disbelief

……Eileen Caddy

F&O / SECTOR WATCH

Mirroring the sharp selloff in the underlying cash market in the week gone by, the derivatives segment also witnessed unwinding of long positions and building of shorts. Benchmark indices closed in red zone, with cut of more than two per cent on weekly basis. Metal, Media and Financial services were major losers on the sectoral front. Maximum Call Open Interest concentration for the Nifty was seen at 17,600 strike, followed by 17,700 and 17,500 strikes respectively, while on Put side, the maximum concentration in Open Interest was seen at 17000 strike followed by 17500 and 17400 strikes respectively.

Implied Volatility (IV) of Calls closed at 12.75 per cent, while that for Put options closed at 13.89 per cent. The Nifty VIX for the week closed at 15.08 per cent. PCR of OI for the week closed at 1.42 lower than the previous week. The entire February month has traded in a range and after failing to hold the higher end of the range, the prices have now slipped towards the lower end. Techies say on the weekly basis, crucial support for the Nifty can be the budget day's low (17,353), which coincides with 50-week SMA (simple moving average - 17,339). Failure to hold these levels, may see the Nifty fall towards 17,000 mark, whereas on the higher side, 17,600-17,800 is expected to be crucial resistance area. Automobile companies will release their monthly wholesale sales data for February on March 1. Auto stocks including Tata Motors, Ashok Leyland, Maruti Suzuki, TVS Motor, Bajaj Auto, Hero Motocorp, Escorts, M&M, and Eicher Motors will be in focus next week.

Economic fundamentals indicate some stress as higher inflation, rising interest rates and slower growth will reduce disposable income. Hence, lower the inclination to spend on discretionary products such as cars. This is already evident in the smaller car segment. The present price ceiling of Rs12 per unit in the Day Ahead Market (DAM) on the energy exchanges has been revised to a price as high as Rs50 per unit. However, the regulator has not kept the floor (minimum) price of power for the HP-DAM market. With electricity demand likely to surge in the upcoming summer season, industry watchers expect merchant power plants to make good returns. Stock futures looking good are Coal India, DLF, GAIL, Infosys, Dr Reddy, LTTS and Godrej Consumer.Stock futures looking weak are AU Bank, Grasim, Hindalco, Syngene, M&M and Vedanta.