F&O Expiry To Keep The Investors On Toes

It was expected to be a volatile day for the Indian equities and it actually was a volatile one. Amid the announcement of Coal Block De-allocation of 204 mines the Indian equities yesterday ended on a flat note. Amid a choppy trading session, as investors turned cautious ahead of the expiry of September F&O contracts while the Supreme Court's decision on coal blocks weighed on select metal and power stocks.

The Sensex lost 31 points to end at 26745and the 50-share Nifty shed 15 points to close at 8,002. However, the selling pressure was persistent in the broader markets. The mid and smallcap index slipped nearly 1% and 1.6% each putting lid to an outperformance seen over the last few weeks. The market breadth ended weak on the BSE with 1,939shared declining and 1,023 shares advancing.

The Supreme Court yesterday cancelled all coal block allocations except government-run blocks that operate on a non-JV basis. The criterion fits just four of the 218 blocks that were deemed illegal by the court in its August order. Media reports said exempted coal blocks included allocations to NTPC, SAIL and Sasan UMPP. The Supreme Court also asked holders of 46 operational blocks to file reply within a period of six months.  As regards the impact of the de-allocation of blocks, the impact is been seen on various power companies and even few banks. While the power capacity to the tune of 28000 MW is expected to be getting affected as dependency on imported coal would increase. Apart from that the investment worth Rs 2.87 lakh crore are under dark clouds now. Further with decision on the gas pricing delayed till November 15, we feel the power sector is likely to witness additional issues.

On the Banking part there is possibility of increase in NPAs from the power and Iron ore sectors.  Data suggests that exposure to iron ore sector is Rs 2.68 lakh crore. The power sector exposure is pegged at Rs 4.88 lakh crore.  We expect the banks to remain under pressure on the bourses.

As we move ahead, today it is expiry of September F&O contract. This has been a very volatile contract and the October contract is expected to be a weak one. We expect a high amount of volatility of persist in the markets.

On the global markets, U.S. stocks rebounded after a three-day slump for the Standard & Poor’s 500 Index, as new-home sales climbed to a six-year high and health-care shares rallied with producers of consumer staples. The S&P 500 advanced 0.8 % to 1998.30, the most since August 18. The Dow Jones Industrial Average climbed 154.19 points to 17,210.06. Reports suggested that, the volatility across stocks, bonds and currencies worldwide is close to record or multi-year lows, even after Fed Chair Janet Yellen cautioned last week that the central bank could pull forward the timing of a rate increase if U.S. economic performance continues to exceed expectations.

Taking cues from US markets the Asian equity indices are also trading in green. While Nikkei is trading in green with gains of 1.18%, Hang Seng is up 0.32%. Shanghai Composite is also trading with gains of 0.54%. SGX Nifty is trading at 8035 (up 24 points) up 0.30%.

We are of the opinion that the de-allocation of coal blocks is a cleaning process which is negative in short term but would be yielding good results in long run. Being a last day contract, there is expected to be a high amount of volatility. In current situation it is not possible for anyone to say with conviction that at what levels the expiry occurs. However we are of the opinion that 8000-8050 are going to be the important support levels today. One can expect the expiry in the similar range.