Ahead of US Fed meet, FIIs pull out $600 million from emerging markets

FIIs paused in their buying across key EMs. Outflows around $100 million were seen from Malaysia, South Korea, and Thailand. Taiwan and India saw outflows of almost $500 million each.

The Nifty50 witnessed a good pullback post the much-awaited state election outcome. The lower difference in the vote share of the party in power at the Centre led to the move.

The move was supported by the domestic institutional investor (DII) flows who bought close to Rs 3500 crore in the last few sessions of the week. In addition, closure of stuck up shorts was another reason for a sustained move of the Nifty.

The immediate support for the index is placed at 10700 where positions of Put writers are increasing. From December 10, this Put strike has seen an increase in the number of contracts from 27000 to 49000.

On the other side, 11000 Call strike open interest has remained flat near 66000 contracts.

This shows that the Nifty is forming a higher base and a further up move can be seen towards expiry. The stock-specific short covering in the beaten down segments is clearly visible, which is leading to a broader market up move.

The mid-cap and the small-cap indices are up more than 3 percent during the week while the Nifty is up only 1 percent.

Volatility has come down from more than 20 percent to 15 percent post the state election outcome, which is a good sign for the market. Also, the market moves, which were quite volatile would calm down on a lower volatility pattern.

Bank Nifty: Close above 27000 likely to trigger short covering:

Volatility remained extremely high for the index where it saw sharp moves on both sides. The state election outcome and the government decision to appoint a new RBI head provided a sentimental boost to the Street.

The Bank Nifty witnessed one of the sharpest recoveries since April and moved above 27000 levels. Stability in the rupee near 71.5 levels against the US$ is also seen as positive by Street participants.

Post the event, the IVs fell sharply to 14 percent from 20 percent, indicating a continuance of the ongoing trend. We feel this will continue to attract OTM Put writing, which will provide the required headroom to the index.

The 27000 Put added close to 6500 contracts last week. We feel the people have been buying protection against their long portfolio. A close above 27000 is likely to trigger short covering. Contracting IV has attracted OTM option writing in 26500 Put and 27500 Call.

In case of any negative trigger, we do not feel the index will move below 26500. However, it is well placed to test 27500 in coming days.

The current price ratio of Bank Nifty/Nifty remained near 2.48 levels, which is the highest level of the price ratio since June 2018. We believe a close above 27000 would attract outperformance in banking stocks, which will push the ratio higher.

Lower US growth forecasts & crucial FOMC meeting keeps fresh FIIs inflows at bay:

US equity benchmarks failed to recover from the strong sell-off that was seen at the start of December. Additionally, the yield on US 10-year continued to build on slower growth pricing for 2019 at play.

However, the dollar continued to stay strong as the euro failed to recover on the back of a dovish ECB and increasing geopolitics uncertainties in Europe. EMs took cognizance of this risk-off tone and MSCI EM equity & forex closed almost flat for the week.

FIIs paused in their buying across key EMs. Outflows in the vicinity of US$100 million were seen from Malaysia, South Korea, and Thailand. Taiwan and Indian saw outflows of almost US$500 million each.

In the Indian F&O segment, fresh long creation is seen from FIIs in index future to the tune of US$122 million. However, index option buying picked up recently as the Nifty neared 10800. For the week, their total index option buying aggregated US$600 million.

Event-wise, the upcoming FOMC meeting on December 20 has become the most important meeting in a long while. Post the last Fed meeting, the market was pricing in 2.1 rate hikes while dots plot suggested three rate hikes for 2019.

However, since then, the market has sharply repriced the rate hike expectation to only up to two rate hikes as growth in GDP and EPS of 2018 was sharply revised lower for 2019 as fiscal stimulus is likely to fade out in 2019. A dovish dot plot could help revive the convergence trend between EMs and DMs.

Disclaimer:- The views and investment tips expressed by investment experts are their own. Ripples Advisory advises users to check with certified experts before taking any investment decisions.

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