The Nifty and Sensex will trend up from the lowest closing levels seen in over a year. The positive market close in US and Europe on Friday the 12th of August coupled with fewer short positions in the market will lead to fresh buying in domestic indices.
US and European markets closed last week’s trading on a good note with handsome gains on Friday. US indices gained over 1% while European indices gained over 3%. Better than expected retail sales numbers in the US coupled with a short selling ban in markets in Europe helped equity indices recoup losses seen during the week. Markets in the US and Europe will be choppy given that underlying pressures have not vanished. Debt worries in the Eurozone remain high despite bond purchases by the ECB. The ECB bought Italian and Spanish bonds last week to calm nervous markets. Markets are also increasingly targeting borderline cases with France being a prime candidate for a downgrade. Ban on short selling works only in the short run, as it does not change fundamentals.
Nifty saw open interest in futures come off on the back of short sellers closing out their positions. Implied volatility in at the money puts stayed steady indicating lack of reluctance to hedge positions at higher premiums. Rise in at the money call options implied volatility suggest long buying at lower levels of the market. The August contract expiry is on the 25th of August and market will look to unwind outstanding shorts before expiry leading to a positive market trend.
The Indian Rupee (INR) lost over a percent against the USD on the back of equity market volatility. The INR will regain some of its losses to trend down below Rs 45 to the USD on the back of improved equity market sentiment.
The market will study the inflation numbers for July 2011 to be released this week. Inflation as measured by the WPI is expected to come in at 9.20% for the month of July against 9.44% for the month of June. Market sentiments will improve if inflation stays below June numbers, as some rate hike expectations will go out of the market.