The Nifty and the Sensex stood out in underperformance last week. The indices fell by around 2% week on week while global indices from Korea to Germany rose by over a percent. US indices were the best performers with close to 5% gains. Most of US equity gains came on Friday the 26th of August, post the US Federal Reserve (Fed) chairman’s speech in Jackson Hole. The Fed chairman Ben Bernanke said that the US economy is likely to do better in the second half of calendar year 2011 and the Fed has enough policy tools to spur the economy if necessary. The Fed refrained from announcement of asset purchases though it extended the September meeting by one day. The extension of the Fed meeting by one day in September has the market speculating on the likelihood of monetary measures to spur economic growth in the US.
Domestic markets are worried about multiple factors. The markets are anticipating another rate hike by the RBI in its September policy review. The impasse on the corruption bill (Lok Pal Bill) between agitators and the government weighed on the markets mind. Global economic worries too held down indices. Expiry of derivative contracts failed to take up the indices as market players held on to shorts. The open interest in near month Nifty index futures contracts hardly moved week on week even after expiry, indicating shorts are still out there in the market. At the Money Nifty Put implied volatility went up by almost 25% week on week, a further indication of hedging by the market. The Bank Nifty was the worst performer amongst sectoral indices last week with a 4.5% fall week on week. The market sold bank stocks on worries of rising bad loans.
Domestic equities are in for a bounce back, but nervous markets are holding back the bounce. The market does not have a strong buyer at lower levels and any sell off is seeing a self fulfilling effect of weak bull unwinding.
The Rupee fell by close to a percent against the USD echoing weak equity market sentiments. The Euro gained against the USD on the prospects of the Fed holding rates at all time lows for an extended period of two years. The Rupee will see strength in the coming weeks on the back of a stronger Euro. If domestic equities manage a rally the Rupee should see a strong bounce back.