Volatility across equity, forex markets likely

The latest macro-data from India is disquieting

Steady buying from foreign institutional investors (FIIs) ensured index gains through last week but the market trend seems to have turned around on Monday. Global selling pressure impacted India as well and there is a chance that this will continue.

The Reserve Bank of India held status quo and its stated worries about inflation were confirmed when the consumer price index (CPI) for May came out higher. A fair amount of volatility is also likely across forex markets in the near-term.

The US Federal Open Market Committee (FOMC) is due to have its policy meeting and so is the Bank of Japan. That will be followed next week by the UK’s referendum of “Brexit” on June 23. These events may cause some volatility and if the UK does actually exit the EU, there could be massive swings.

Meanwhile, the latest macro-data from India is disquieting. While the latest GDP estimates suggest that growth hit 7.9 per cent in January-March 2016, the Index of Industrial Production fell into negative territory in April and the CPI edged higher in May.

Domestic institutions have been net equity sellers in June. The FII sold rupee debt for the first few sessions and now appear to be selling equity. However, monsoon expectations remain strongly positive and that could pull down inflation.

The technical position continues to look bullish. This could be the first correction in a new bull market. The area to watch on the upside would be Nifty 8,300. A rise past that would continue a sequence of higher high.

The danger zone on the downside would be 7,750-7,800, where the 200-Day Moving Average (200-DMA) is running. If the index falls below that level, the bull market prognosis would change.

The Nifty is well above its 200-DMA and it should consolidate above that level. If it does, the long-term trend will be confirmed positive. Breadth and volume indicators have looked positive. The short-term trend could now be dependent on global investor attitudes and the Fed advisory and of course, Brexit.

The Nifty Bank is seeing some unusual movements. The new weekly options have certainly aided in trading liquidity. But, the futures (June 30) are trading at a discount to spot.

There could be interesting calendar spreads coming up where traders will, for example, sell the near-week option and buy the month-end. A careful assessment of liquidity and the likely volatility per week, versus volatility per month, will have to be made. As of now, the perspective seems bearish.

The put-call ratios (PCR) suggest that the trader-sentiment remains bullish. Both the June PCR and the 3-month PCR are in positive territory with the ratios held at above 1.2. In the June series, OI peaks in the calls chain at 8,300c and 8,400c with reasonable OI till 9,000c. The OI is the June put series has its largest peak at 8,000p but there's plenty of OI down till 7,000p.

The Nifty closed at 8,110 on Monday with a futures premium of about 20 points. A bullspread of long June 8,200c (75) short 8,300c (40) costs 35 and pays a maximum 65 and it's about 90 points from money. A bearspread of long June 8,100p (96), short 8,000c (63) costs 33 and pays a maximum 67 and it is bang on the money.

A wider set of strangles of long 7,900 (41), long 8,300p (40.3), offset by short 7,800p (27), short 8,400c (19) costs a net 36. It offers a maximum return of 64 and breakevens at 7,865, 8,335. This is a long way from the money. It is attractive because the current global conditions suggest that there could be a swing of this dimension.