We believe the 10,500-10,800 range is likely to continue till the month-end, which coincides with the May settlement.
The Nifty has remained under pressure after testing the 10,900 mark. Call writing was seen at 10,800 which should keep the index below this level for some more time.
The major problem seems to be stock-specific selling pressure, which has been increasing whenever the index slips from higher levels.
Historically, sharp rupee depreciation within a short period has led to a decline in stock markets. However, this time stocks are seeing more selling in comparison to the index. Only certain Nifty heavyweights were able to support the index.
10,500-10,800 range on the Nifty is likely to continue till the month-end, which coincides with the May settlement.
The ongoing result season is also impacting stock moves. Stocks which posts better-than-expected earnings are getting rewarded with strong price performance, a sign that the market is not totally in a bear grip yet.
FII outflows have continued though DII inflows have been supportive. Major outflow is seen in the debt market where outflows have been more than double that of equity markets. This is also leading to higher bond yields and rupee depreciation.
Bank Nifty likely to slide towards 25,500 levels
After outperforming in the past few weeks, the rally in the Bank Nifty finally paused after gaining nearly 1,500 points in just two weeks. The index found it difficult to sustain and move above 26,900, which resulted in a sharp reversal in the index.
Karnataka election cliff-hanger, rising dollar against the rupee and higher global crude oil prices raised concerns about macros, which piled on pressure on the index.
Apart from HDFC and Kotak Mahindra Bank, all major public sector (PSB) and private sector banks witnessed selling. A fresh round of shorts has been seen forming in the PSB pack, indicating limited upside for the index.
Any major bounce should be used to create fresh short positions. As the index has slipped below the crucial support of 26,000, call writers have shifted their positions lower to 26,000 and 26,200 strikes from 26,500 strikes. The only strike where sizeable additions were seen was 25,500 Put, indicating further downside in the coming days if the index continues to hold below 26,200.
The current price ratio (Nifty/Bank Nifty) has been hovering near 2.43 levels. As the Bank Nifty has been outperforming the broader indices since the past few weeks, we feel the index is likely to extend its profit booking trend, which may pull the ratio lower towards its previous support levels of 2.39.
Higher benchmark bond yields in the US weigh on EMs
The risk environment remained adverse for most emerging markets as US yields and crude oil continue to remain at elevated levels. MSCI Emerging Market index is down almost two percent last week.
Weaker currencies, as well as risks over rising debt, led to profit-booking in EMs. US treasury yields tested the 3.11 percent mark, the highest since 2011, on the back of rate hike prospects.
Sharp equity outflows were witnessed in EMs - South Korea ($572 million), Malaysia ($375 million) and Indonesia ($193 million) - last week. Taiwan was the outlier with inflows of over $188 million.
Korean peninsula concerns linger as North Korea has threatened to pull out of scheduled historic meet between US President Donald Trump and North Korean leader Kim Jong-un over a US-South Korea’s joint military drill.
In futures and options, some short closure was seen in options segment, in the run-up to Karnataka state elections. Domestic inflows to the tune of $450 million, however, remained intact, helping to limit sharp declines in equities.
Domestic yields have retraced from about 7.92 percent levels to 7.81 percent at present. Higher yields have also led to sharp outflow redemptions from domestic debt segment.
Venezuela election outcome, as well as move in crude oil prices, remain factors to be watched out in the near-term. Any decline in crude oil prices could weigh on the dollar as well as provide support to emerging market debt.
Rupee roils over Karnataka political turmoil
The Dollar index tested its highest levels in 2018 as rising US 10-year bond yields and relatively less hawkish major central banks supported the dollar versus other major currencies. The US 10-year benchmark treasury yields tested 3.11 percent last week, its highest since 2011.
The euro lost sharply against the dollar losing almost 1.17 percent while the Japanese yen lost almost 1.42 percent. EUR:USD is at the supports of 1.18 level while JPY:USD could decline till 112 as the Bank of Japan remains one of the last major central banks continuing its accommodative monetary policy stance.
The rupee extended its losses for the sixth straight week against the dollar, falling below 68.10 levels, its lowest since January last year. USD:INR has supports near 67.70, while 68.50 is a crucial near-term resistance. Any decline in crude oil prices could see some recovery in rupee losses.
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