The expiry of August derivative contracts this week will see short positions in the market being covered. The Nifty index fell over 4% week on week, taking the August to date fall close to 12%. Nifty near month index futures added 6% in open interest last week even as the market fell by 4%. Implied volatility in Nifty At The Money Put Options moved up by 10% week on week indicating hedging in a falling market. Market players will look to cover shorts at current levels of the index given the sharp fall over the month and the fact that markets are trading at over one year lows. The days leading to expiry will see markets bouncing from lower levels on short covering and the Nifty index is likely to the end the week on a positive note rather than a negative note.
The fall in mid cap index and sectoral indices of Bank Nifty and the IT (Information Technology) index was higher than the fall in Nifty, indicating that index fall is leading to concentrated selling in vulnerable stocks. This trend is likely to continue and Nifty will outperform mid caps and select sectoral indices on the upside. Markets will prefer to trade the broad market on the upside given current uncertainties.
There are serious concerns on the economies of the US and Europe. The US is facing downward revisions in growth as high unemployment coupled with lack of policy response is hitting the economy hard. European countries including Germany and France are seeing the effects of economic weakness in the region. France GDP growth for the second quarter was flat while Germany saw growth come in below market expectations. Markets in the US and Europe are worried about the fact that growth will slowdown further as governments focus on controlling debt.
The Japanese Yen is now seen as a safe have currency. It has moved up by over 6% against the USD in the last couple of months as investors see the Yen as a currency unaffected by global issues. The strength of the Yen is counter productive as Japan is a large export driven economy and a strong Yen in the face of a weakening global demand will hit the country’s exports hard. The Bank of Japan intervened to take down the currency, but as in the past intervention did not prevent further strengthening of the currency. The markets will test the resolve of Bank of Japan in keeping the Yen stable.