Volatility is not gone out of markets. The positive week on week close of the Sensex and Nifty is not an indicator of an upward trend this week. The sharp increase in Nifty at the money put implied volatility indicates hedging activity. The only consolation for markets is the fall in near month Nifty future open interest as shorts were allowed to be closed out in expiry of September contracts last week. Mid cap indices did not follow broad market strength, closing negative week on week.
The weakness in the Euro against the USD implies that the debt crisis in Eurozone is still on the boil. Markets briefly looked up post the German parliament vote on the EFSF (European Financial Stability Facility) with a brief rally in equities and the Euro mid week, but the weak close of markets on Friday the 30th of September indicate continued weakness ahead, especially for the Euro.
Markets will look at global manufacturing data and US employment data for any positive triggers. Weakness in global economic data will pressure markets downwards However weak economic data could be a positive for inflation hit India and China and allow the central banks to maintain status quo on policy rates. Expectations of economic weakness have brought down commodity prices with the Reuters CRB commodity index which tracks 19 commodities down by over 12% in the month of September. Lower commodity prices will bring down inflation expectations in India and China. Inflation in these countries are trending at 9.78% and 6.2% respectively, levels that are far above the comfort zone of policy makers.
The Indian Rupee will likely come under pressure this week on worries of capital outflows and rising current account deficit. RBI data showed current account deficit higher by USD 2 billion for the first quarter of 2011-12 over the first quarter of 2010-11. The Rupee could again test levels of Rs 50 to the USD this week.