Emerging markets continued their outperformance throwing in sweet surprises to global investors. Indian markets have grossly outperformed the developed nations with a return of 60% since March 2009 vis-?-vis 39% delivered by the S&P.
Even as the Nifty managed to scale key heights (psychological high of 5,000 struck after 16 months), there is a growing concern of stretched valuations, possibility of a trade war between China and America and continuing decline of the USD. Liquidity continues to be the key driver of the rally with FII inflows continuing throughout the week.
After spending most the last week consolidating above the 4,800 level Nifty resumed its upward trajectory with new vigor. What has changed essentially is the rise in open interest accompanied by the rise in underlying index. Broader markets have too seen higher participation especially the high beta mid cap names. Nifty September futures mirrored this sentiment as it continued to close at higher premiums to the spot. This jump means that traders continued to maintain long trading positions, albeit with jittery nerves. Statistically Nifty Sep futures has an open interest of 27.83 million shares with cost of carry still in positive zone suggesting continued build up of long positions. September Put Call Ratio (PCR) continued to be at a robust 1.70 – certainly overbought though.
Options speak
For the week 4,600 puts maintained the highest open interest at 9.47 million shares, mainly through put writers in anticipation of the continued buoyancy. The build up on the call side on the other hand indicated 5,000 being the most anticipated resistance level. Not only did the 5,000 strike hold the maximum open interest during the week but also the highest addition of open interest took place in 5,000 calls for most days of the week. Indeed then we saw markets sniffing the 5,000-mark and struggling to stay above the coveted mark on closing.
While these points highlight the support and resistance for the Nifty, on comparing the rise in open interest of the near-term in-the-money options, expectations of a sustained rise are favored.
Global talk
The recent brouhaha created by the comments of US president Obama by imposing a 35% tariff on Chinese tire imports cannot be certainly taken lightly?more so for the emerging markets like ours. Trade relations between the US and China goes back a long way but sizzling point to the relationship started from 2002.
In 2002, US embarked on an historic monetary experiment to reflate a post-bubble economy by lowering interest rates to 1%, the lowest in 50 years. This economic upswing resulted from an America and China joined at the hip in a state of economic interdependence. Americans were the spenders and the Chinese were the savers and producers. Meanwhile, China ran a huge current account surplus, accumulating $2 trillion stash of largely US dollar-denominated international reserves.
This state of affairs was always unsustainable?more so after the collapse of the global financial system in 2007. However, the flashpoint came in 2008 when the US dollar plummeted to record or multi-decade lows against a host of other major currencies, leaving China?s reserves diminished in value.
The first indication of Chinese concern came as the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac collapsed last August. The Chinese had put much of their reserve money into GSE debt, believing it as safe as the US government debt. But when the GSEs collapsed, the Chinese were caught out and warned they could dump dollar-denominated assets unless they were made whole. Subsequently, Fannie Mae and Freddie Mac were nationalized and creditors were made whole.
The next flashpoint was created by comments by treasury secretary Tim Geithner. Geithner charged China with ?manipulating? its currency. The Chinese retaliated slamming the US as a profligate nation in unusually stark terms that raised quite a few eyebrows
By this point – early 2009, in the G 20 meet Chinese central bank head Zhou outright called for a new international reserve currency. The drumbeat of anti-Dollar news coming from China got louder and louder during the spring. The Chinese started settling trade in Yuan instead of dollars and were speculated to be stocking up gold supplies – (is this why gold continues to rise unchecked?)
The final spark was Obama?s comment to which China announced dumping and subsidy probes of chicken and auto products. This might be the final nail in the coffin as the ?happy? marriage ends. The question is whether it will end gradually and peacefully in divorce or violently in murder-suicide. The fate of USD thus rests against the portentous outcome of this event.
?The writer is a derivatives analyst