By V K Sharma,
The Nifty tumbled 1,164 points or 4.45% last week as the FIIs sold Nifty constituents for a slice of the dragon fruit.
The Chinese CSI 300 that houses the top 200 stocks in Shanghai and the top 100 stocks in the Shenzhen stock exchange rallied over 25% in a nine-day blitzkrieg last fortnight after the Chinese authorities took a series of decisive steps of monetary easing and regulatory adjustments that were seen as unprecedented.
Global investors had almost given up on China due to the malaise in the long-ailing real estate sector, the weakening of consumer confidence and the depleting resources of local governments. Just a fortnight back, Morgan Stanley had cut China’s weightage in their MSCI EM IMI Index. But the surge in the Chinese indices since then had the FIIs scrambling back to China. They had no hesitation in booking profits as our Nifty was up a healthy 17% in this calendar year at the beginning of the week.
The Chinese markets re-open on 8th October after a seven-day National Holiday.
Our Economy continues to be robust but the slowdown in MoM figures of the Manufacturing and Services PMI, lower GST collections and government spending may have given the FIIs an additional excuse to switch.
Manufacturing also continues to decline in China as they have reported the fifth consecutive months of contraction in its PMI.
The Chinese have now thrown the kitchen sink at the markets. The FIIs are hoping that this will work this time.
China’s problem is that they are trying to make up for the lost international market by flogging its domestic consumption. They have failed at this in the past and are likely to meet the same fate this time as well unless they make the much-needed structural changes. Xi may have just bought some time to breathe easy.
India on the other hand is making its capital markets safer by reducing the number of weekly expiries to just one per exchange. Many index derivatives have been raised in the market to keep the small trader out of harm’s way. Margin requirements are being increased. By November 20, the markets will be a much safer place for the small trader.
The markets are technically weak as the Nifty has closed below its 50-day exponential moving average (dema). On August 5, 2024, the Nifty broke the support of the 50 dema in intraday trade but recovered to close above the marker. Now that this support has been broken on a closing basis, it is a bearish development. Negative divergence has appeared in the RSI, which further adds to the worries.
The market volatility is likely to remain high. The Nifty has a strong resistance at 25,500. Support exists at 24,368 (38.2% retracement) and 23,780 (50% retracements).
The weakness may now spread to the mid and small caps going forward.
(The writer was head of market PCG and Capital Market Strategy, HDFC Securities)
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