Mario’s Magic Does Wonders

The Indian markets yesterday traded in a range-bound manner during the entire trading session, being volatile between a tight range of 50 points when after 2 pm the markets saw some heavy selling of small-cap and mid-cap stocks, thus dragging the Sensex and Nifty down by more than 1 per cent. Signs of the sell offs were seen from the beginning of yesterday’s session with the small-cap and mid-cap indices down by more than 1 per cent. The situation saw a sudden aggravation in the second half of the day and the small-cap and mid-cap indices both closed 2.07 per cent lower.

The Sensex closed 206.23 points lower, down by 1.22 per cent and the Nifty closed 66.6 points lower, down by 1.30 per cent. These sell offs were primarily due to NBFCs selling off stock holdings that were pledged by small and mid-cap companies in order to get funding. On failing to provide margins because of no appreciation in stock prices, NBFC sold these off to recover their dues. Some companies had pledged shares in the range of 40 to 90 per cent. After the sell-off some of the stocks saw a large chunk of their capitalization disappearing because of a heavy downfall in the stock prices with some stocks declining in the range of 20 to 40 per cent. 

Yesterday, Mario Draghi, president of the European Central Bank (ECB), added some positive comments after which there was optimism filled in markets worldwide. Stocks rose in all parts of the world, from Asia to the U.S. He said that policy makers will do whatever is needed to preserve the euro and to control the surging bond yields. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” Draghi said. “And, believe me, it will be enough.” These words provided for the sentiment the markets were looking forward to in order to get an upward boost.

The Asian markets closed positive yesterday for the second day, attributed to Draghi’s comments and to some corporates announcing earnings better than estimates. Konika Minolta, LG, Hitachi were among these companies. Japan, however, witnessed some cooling in the growth of the economy, evident from the news that Japan’s consumer prices fell and retail sales were lower than expectations. Heavy gains in the yen and austerity in Europe have largely hit the exports of Japan which is now relying on domestic growth for expansion with the kind of slowdown witnessed in global demand.

The GDP figures for the economy are due on August 14, 2012 and officials want to wait and monitor the situation for being decisive on the fiscal stimulus post the release of the data. Draghi’s statements though overpowered this situation and added hopes on the global demand picking up, resulting in more than 1 per cent gains on the Nikkei. Today as well, the Asian markets have opened in the green with Hang Seng, Nikkei and Shanghai trading positive in the range of 0.24 per cent and 1.53 per cent.

In the U.S. investors are hoping for the Federal Reserve to embark on the third round of quantitative easing. The results in the U.S. have been weak with Facebook, Amazon and Starbucks, among others, posting sluggish figures. The European markets were the largest gainers due to Draghi’s announcement. The FTSE, DAX and CAC closed encouragingly higher, gaining 1.36 per cent, 2.75 per cent and 4.07 per cent.

Meanwhile, oil has been seeing strong correlation with the European situation lately. With the positive announcement and optimism spread around the world, the oil prices rose to USD 105.42 per barrel yesterday, up by 0.15 per cent. The rupee saw some relaxation yesterday with it going below the 56 mark, closing at 55.948. The rupee had been hovering on the higher side of 56.5 on Wednesday. The euro reached a 2 week high yesterday after Draghi’s announcement.

Similar to the trend followed in the previous two trading sessions, yesterday too there was an outflow of FII funds. The net outflow of money from the FIIs was Rs 252.91 crore. Moreover, option movement indicates a higher addition of shares in open interest due to puts. The highest open interest build-up is to be seen in options with strikes of 5,000 for call and 5,200 for put. This indicates the range of Nifty, according to traders.

Due to the fact that there still has been no policy action to boost the economy, the markets seem highly disappointed as there were high expectations of some activity on the policy front post the Presidential elections. We think, this coupled with the heavy sell off seen in the last hours of trading yesterday will not set a favourable outlook for the markets today. Certainly the rise seen in global markets post Draghi’s comments will provide some support in the markets. But overall, we think the markets would open flat to negative today. Moreover, many big banks are posting their Q1 FY13 results today. This will also create some amount of volatility in the markets today.