Stock indices across Japan (Nikkei 225) and South Korea (Kospi) rebounded up to 11 per cent in early trade today, following a steep fall in the previous session, even as US stocks tumbled for yet another session overnight. The two Asian indices had fallen up to 12.4 per cent in the preceding session. Australian market also opened marginally higher, as investors felt the recent steep fall in equities was unwarranted. Will Sensex and Nifty recover today?
At 7.04 am, Gift Nifty was trading 195.50 points, or 0.81 per cent, higher at 24,317.50, suggesting a firm start for the domestic market.
While fears of a looming US recession have taken toll on investor sentiment so far, the unwinding of Yen carry trades, fears that Iran could attack Israel anytime, uninspiring quarterly results in India and rich valuations have added to turmoil. US stocks settled up to 3 per cent lower overnight.
Earlier, Sensex had settled Monday's session at 78,759.40, down 2,222.55 points or 2.74 per cent. This was below the level of 80,429.04 that the 30-pack index settled on July 23. Nifty plunged 662.10 points, or 2.68 per cent, to close at 24,055.60. This was lower than a low of 24,074.20 level that Nifty hit on July 23.
Nifty and Sensex falling below 20-day SMAs after a long time is clearly a negative, said Shrikant Chouhan, Head Equity Research at Kotak Securities. The two indices formed long bearish candles on the daily charts yesterday and the market texture was weak.
"Due to temporary oversold conditions, we could expect one intraday pullback rally. For day-traders, Nifty and Sensex levels of 24,000 and 78,500 would be the immediate reference point. Above the same, we could expect intraday pullback up to 24,150-24,250 and 79,000-79,300 levels, respectively," Chouhan said.
On the flip side, Chouhan sees a Nifty level below 24,000 and a Sensex value below 78,500 to accelerate the pressure. In that case, Nifty may retest the level of 23,900 and Sensex 78,300, he said.
The Bank of Japan recently announced a well-telegraphed 0.25 per cent rate hike and signaled more hikes in the future. It also announced a reduction in bond purchases. Expectations of a rate cut in the US contributed to a weaker dollar, making the yen stronger comparatively, which has led to an unwinding of Yen carry trades. Japanese yen appreciated 3 per cent against the dollar last week.
"When yen strengthens, the carry trades become less profitable and investors rush to unwind their trades and avoid losses. This means selling off investments to repay borrowings. This has also played a role in the global sell-off including India. This also led to Japanese stock markets falling down by 20 per cent from their recent all-time highs. The Tokyo stock exchange has triggered a circuit breaker for the TOPIX due to significant market volatility," said Ajit Banerjee, Chief Investment Office of Shriram Life Insurance Co.
Japanese investors hold equities worth nearly Rs 2.05 lakh crore in India and a stronger yen prompted some selling by such investors, said Vikram Kasat – Head of Advisory at PL Capital.
Another persisting concerns has been the looming retaliation by Iran and its regional allies on Israel; and US and other western allies getting involved in support of Israel that may lead to a full-fledged war in the region.
"Any war breaking out will lead to huge global disruption and unsettle the world economy, which is stilling limping. If the war escalates from current levels, it will hit market sentiment strongly given the uncertainty around production and price of critical crude oil resources that these countries possess, besides other repercussions of a war on global economy and trade," Banerjee said.
In the case of US, as per the CME Group’s FedWatch Tool, the market participants are now pricing in a 71 per cent probability of a 50-basis point rate cut in September, up from 31 per cent before the jobs data was released. The market participants are also expecting an emergency 0.25 per cent rate cut in the next one week.
"Worries over earnings of tech stocks have also to led to the Nasdaq 100 falling 17 per cent from its recent highs in July. China and Europe are also facing a slowdown in the economy amid an escalating geopolitical tension, which is further adding pressure on the markets," PL's Kasat said.
For investors, "creating long gamma positions would be a prudent way to trade the market. Investors wanting to hedge their long-term holding can initiate a protective put strategy and buy Nifty 24,000 PE for the August expiry which has a premium of Rs 410,” he said.
Jatin Gedia – Technical Research Analyst at Sharekhan said the immediate hurdle for Nifty is placed at 24,300–24,350," he said.
Rupak De, Senior Technical Analyst at LKP Securities said support for Nifty is placed at 23,900-23,700 levels. On the higher end, resistance is seen at 24,200-24,500 levels, he said.