Why Japanese Quake is Enough to Shake Our Markets?

Last week, we wrote that the week could be a turning point. We expected that the markets is likely to fall to 5300-5350 level and then bounce. Similarly the Bank Nifty level which we mentioned were 10,500-10,570. We were at 5535 and 10,967 levels when it was written last week.

The markets fell on Monday itself and after dropping to 5400 levels / 10,650 levels bounced sharply. It gave an impression that the dip was short lived and we were back on the rising territory. However, the development over last 3 days have not been very encouraging.

Markets were showing strength till Wednesday, when the Govt. announced that the fuel price mechanism (to change the retail prices of fuel whenever there is a rise in international crude prices) will not be followed. I think, that was the starting point of the new fall. That day, Bank Nifty gave out all gains and Nifty also closed weaker.

From that day onwards, every incremental news has added to the concerns to the market rather than doing any good. First, it was a news of Moody’s downgrading Spain which strengthened Dollar against Euro. Next, it was yen getting weaker against Dollar due to the Earthquake.

What can happen next week:

Quick Macro:

1. ECB continues its stance to increase the interest rates by 25 bps. As I mentioned in my last blog, this can distort the recovery path of the PIGGS countries and hence, the European Debt Crisis can re-emerge.
2. In Indian Markets the IIP numbers came at 3.70% is better than what market expected. And that makes it almost certain that in March, RBI will increase another 0.25%.
3. Japan was hit by the massive earthquake, which has damaged a significant portion of their North Eastern Port areas including blast in Nuclear Plant and host of bad news of massive destruction. This would mean that Japanese Economy will have to do a lot of fiscal expenditure to bring back the economy on track. It means lot more which we will discuss next.
4. Libyan situation is showing no signs of improvement. However, the international crude prices have shown some cooling off simply because of dollar getting stronger against host of currencies.

How does this impact:

·         Increase in Bank Rate would again mean additional burden on Indian corporate and also for banks, it would squeeze the margins, while increasing the risks of NPAs.

·         Dollar getting stronger against many currencies is not a good news for Emerging Markets for three reasons.

·         One, the market returns in dollar terms depreciate due to appreciation in Dollar. If there is a view that in a short term dollar will continue to rise, expect a big sell off in Emerging markets.

·         Two, dollar rising against rupee would mean higher current account deficit, which is already running under stress. This would mean further stress on rupee.

·         And three, all the commodity plays are driven by their international prices. With dollar increasing and international prices dropping, it puts pressure on the Indian Companies, whose profitability is directly linked to the prices of the commodities.

How the Micro looks like:

1. As we anticipated last week, a reversal seems to have started. That means, we need to be very cautious at higher levels and protect the long only profits. Nifty seems to have got trapped and if it opens low on Monday with showing no signs of recovering, we may see a sharp fall during the week.
2. Nifty can go up to 5530-5550. But if it doesn’t sustain at higher levels, the fall is almost certain and we may go back to the previous lows.
3. Before breaking the previous lows of 5175, it may try sustaining above 5320-5375, where the near term support is being put.
4. Similarly, Bank Nifty can head up to 10030 on a higher side and if it doesn’t sustain, it can go back to previous lows.
5. Immediate support is at 10,650, which was last week’s low. But there are high chances of this getting broken due to poor sentiments and macro uncertainties.
6. Next support is only in the region of 10,380-10,450 levels.

My current view is more BEARISH than BULLISH. This is because after a 5 week relief rally, the markets have started showing signs of uncertainties and weakness. Although the levels anticipated were not broken during last week, it also gave an impression that there are macro headwinds and global uncertainties which makes it almost clear that there is “No Good News in Making”.

So, if you have not liquidated your longs during last week, be agile this week and also think of taking a hedge by shorting Nifty / Bank Nifty at higher levels.