Market’s better off heeding the warning signs

The market seems to be in a comfort zone on the back of good second quarter corporate results. Global markets also have been pretty stable, adding to the comfort.

However, there does seem to be disquiet on the government and the central bank’s side on asset price bubbles and inflation. There is an effort to talk down the market, which is at all time highs, and the authorities do not want a repeat of May 2006.

The overnight spike in US yields by 10bps on good employment data, suggest that global economies are not done with rate hikes. The market is better off listening to warning signs.

The derivative market saw leverage added in Nifty index futures with open interest increasing by around 15%. Foreign institutional investors (FIIs) have been significant buyers in Nifty index futures over the last week with net purchases of Rs 856 crore. FII buying in index futures may indicate expectations of large FII flows ahead. If this does not come through, there could be volatility in the market. Single stock futures were active with focus shifting to stocks such as Reliance Communications and GMR Infra, which have seen significant additions in open interest. The market is betting on increased institutional activity in such counters. In the options market, implied volatilities are at six-month lows, indicating the market is not betting on any large directional move in the immediate future.

Top five traded single stock derivative contracts

The top five traded single stock derivative contracts for last week were Reliance, SBI, Reliance Communications, GMR Infra and Tata Steel. Reliance Communication and GMR Infra replaced Sterlite and Hindalco in the list of top five traded single stock futures from the week before last. Reliance stock futures price gained close to 14.6%, while open interest was down by 8% week-on-week. The stock saw good gains on news of increased capacity in its gas find in the KG basin, fund raising plans and its commencement of retail business. The stock futures, however, saw open interest being cut and the basis spread go into negative as players took profits at higher levels. It could see further profit taking at higher levels given that all near term market moving news is out.

SBI stock futures price gained around 2.8% week-on-week, while open interest was higher by almost 5.5%. The market bought into SBI as the monetary policy of the central bank was not as negative as the market expected it to be. The stock should see profit taking at current levels, given its sharp run-up of over 7% over the last two weeks. Reliance Communication saw heavy trading in the stock futures market after its second quarter results and positive tones of the management. The stock futures price gained around 1% week-on-week, while open interest was up by 56%. The spurt in leverage indicates volatility ahead.

GMR Infrastructure came into the top five traded stock futures contracts on the back of increased institutional interest in the stock. The stock futures price gained 12%, while open interest was higher by 26% week-on-week. The stock futures saw players build up positions in the futures contract, front running institutional purchases. The stock could see volatility once institutional activity stops.

Tata Steel stock futures price lost around 2% week-on-week, while open interest was higher by around 7.6%. Leverage is high in the counter and the market is expecting a strong directional move.

Nifty index futures

Nifty index futures price gained close to 1.8% week-on-week, while open interest was up by almost 15% The basis spread closed last week at a premium of 12 points to spot up from 10 points seen in the week before last. The index futures saw leverage being built at higher levels of the market and given the consistently high premium, the market is expecting a positive move in the Nifty index.

Nifty index options

Nifty index options saw call premiums gain around 35% across strikes week-on-week, while put premiums lost around 40% across strikes. Open interest was added across contracts as the market bought into lower implied volatilities (IVs). IVs for calls were down from 17% to 16% levels, while put IVs were around 19% from 22% levels. The low IVs suggest flat market movements in the near term.

FII activity

FIIs were net buyers in Nifty index futures for Rs 856 crore last week against net purchases of Rs 603 crore in the week before last. FIIs were net sellers in single stock futures for Rs 339 crore against being net sellers for Rs 729 crore in the week prior to last week. FIIs buying in index futures indicates expectations of further inflows into equities.

Product-wise traded volumes

The daily average volumes in the derivative market was lower last week at Rs 25,568 crore against Rs 30,676 crore recorded in the week before last. Nifty index futures accounted for 30% of total daily average volumes last week, while single stock futures accounted for 58% of total daily average volumes. The markets could see Nifty index futures trading higher volumes given th increased leverage being built into index futures.

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