The Sensex and Nifty is poised for extreme bouts of volatility. The equity indices can swing either way by 2% to 3% on an intra day basis. Market positioning coupled with global market weakness and policy events will drive the volatility.
Nifty index futures added 4.5% in open interest even as Nifty at the money put implied volatility went up by over 8.5%. The open interest in index futures is at two month highs. The Indian Rupee (INR) fell by 1.4% week on week against the US Dollar (USD) in line with a broad USD strength. The USD index went up by 3.3% week on week led by a 3.8% fall in the Euro against the USD. Global indices fell sharply on Friday the 9th of September, with the German DAX leading the fall. The DAX fell 4% on Friday to take the week on week fall to 6%. India was the only major equity market to close in positive territory week on week.
This week is an event filled week with the RBI mid term policy review scheduled for the 16th of September. The government will release the IIP (Index of Industrial Production) data for the month of July 2011 and the WPI (Wholesale Price Index) data for the month of August 2011. If IIP growth shows a slowing trend as compared to the year on year growth of 8.8% seen in June and the WPI comes in around July levels of 9.22%, the market will start factoring in a more neutral monetary policy as opposed to the tight policy seen over the last eighteen months.
Global markets will look at US Federal Reserve (Fed) for direction in the coming weeks. The broad trend of the equity markets is down but if Fed pulls out a surprise tool to improve economic growth prospects, the markets could reverse the trend. However there is increasing concern in the markets on policy maker’s ineffectiveness to stem the debt issue contagion. Bond yields on indebted countries debt surged last week on default worries. Greek two year bond yields touched levels of 58% indicating a near certainty of default. The Euro will suffer the most on a Greek default, as the sentiments will spill over to other countries such as Spain and Italy, which are large economies in the Eurozone.