Greek elections and Spanish borrowing costs spooked markets last week with equity indices across the globe falling. Oil prices fell and the Euro weakened on the back of worries in the Eurozone. Markets ignored positive GDP numbers from Japan and a record breaking Facebook IPO in selling risk assets. Treasury yields fell on safe haven buying.
Equity and commodity prices are close to lows seen in the calendar year. US ten year treasury yields are close to record lows while the US Dollar index is close to highs for the year. The question is when would the risk aversion trades come off and what could trigger them? Greek elections are in mid June and talks of Greece exiting the Euro will persist. Economic data in the form of better employment numbers in the US and better manufacturing growth across geographies could provide relief to markets. However until Greece get sorted out, markets will be nervous though it is not likely to test new lows given positive outlook for the US and German economies.
Sensex and Nifty tested lows this week before bouncing back on bottom fishing and short covering. The Rupee closed at all time lows against the USD on weak sentiments. Nifty near month futures added 6% in open interest while Nifty put options saw implied volatility fall. Nifty call option implied volatility rose. Derivative positioning suggests short covering and fresh longs in the market.
Sensex and Nifty will see good support at current levels even if there is a tendency to test the levels given nervous markets. The Rupee will hover around Rs 54.50 levels though fresh selling from current levels is not on the cards given expectations of RBI intervention at lower levels.