The sharp fall in domestic equity indices week on week has left markets wondering about how much further to go? Indices fell across the board with the mid cap index falling the most, with a 6.9% loss week on week. The Indian Rupee (INR) fell to its lowest level in two and half years to close the week at Rs 51.30 to the USD and this fall weakened equity market sentiments. Everyday news is driving markets and this is likely to continue until markets have had enough of trading incremental news flows.
The news from the Eurozone was not positive with yields on Spanish bonds touching record highs on the contagion effect of Greece and Italy on indebted Eurozone countries. The resistance by the ECB to step in and protect rising bond yields in the Eurozone is proving to be negative for markets. The Euro fell by over 1.5% week on week on the back of rising bond yields in the Eurozone.
Economic data came in positive with Germany and France showing third quarter GDP growth of 0.5% and 0.4% respectively against second quarter growth rates of 0.3% and – 0.1%. A better than expected rise in leading US economic indicators indicated that the US economy is not in as bad a shape as it is made out to be by the markets.
The US debt issues is coming back into focus with an agreement yet to be reached on the scaling back of US debt. If no agreement is reached, rating agencies may take this as a negative development and downgrade US credit rating. US banks are also coming in focus on the back of their exposure to Eurozone debt and rating agencies are likely to downgrade some large banks on the back of Eurozone debt exposure.
On the domestic front, the market will be nervous at the start of this week’s trading. Weekend raids on Vodafone and Airtel, weak close in European indices and the volatility of last week will weigh on markets minds. The November series derivative contracts are expiring this week and this could add volatility to the market.
On the derivative side Nifty futures open interest dropped while Nifty option volatility rose. The market may look to unwind shorts in the expiry week and post unwinding markets could see support at lower levels.