Jun 18, 2013 01:29 PM IST | Source: CNBC-TV18

Mkt may see short covering bounce if Fed delivers: Nomura

FIIs have been building short positions ahead of the FOMC meet, if Fed delivers then one can expect a short covering bounce, says Tushar Mahajan of Nomura.

Tushar Mahajan, head of listed futures & options at Nomura India sees Nifty touching 6,000 in June despite the market not performing too well in the first two weeks of the series. 

All eyes are now on outcome of the two-day Federal Open Market Committee (FOMC) meeting. Foreign institutional investors have been building shorts ahead of this event. If Fed delivers then one can expect a short covering bounce, he said.

"In case there is a short squeeze post this big event, one could see 6,000 on the cards. I do not see the market going beyond 6,000 levels, but 6,000 is a fair play over the next seven-eight days," he told CNBC-TV18 in an interview.

Meanwhile, he expects telecom player Idea Cellular to see some more momentum going ahead.

Also Read: Valuations of EMs attractive; underweight on India: Citi

Below is the verbatim transcript of Tushar Mahajan's interview on CNBC-TV18

Q: Were you a bit surprised to see the market selloff to that 5,700 mark in just a few days?

A: Absolutely. We saw that trend starting with the rupee and then it trickled down to the equity market. The velocity of that fall was steep almost 6,200 to 5,700 in about a span of two days. Thankfully, we saw some bit of resemblance on last Friday. Therefore, we are still not out of the woods but definitely trying to inch along and inch up higher over the past two days now.

Q: How are institutions positioning themselves ahead of the big global event, which is what the Fed decides to do? Is the market largely short at this point? How have they hedged themselves going into that event?

A: If you look at the data over the last few days, especially on the index futures side and the kind of position built-up that has happened over there, we have seen the foreign institutional investors (FIIs) turned from a net positive in terms of outstanding positions to a significant number of net shot. That position continues to be added over the last few days as well despite Friday’s and Monday’s moves, we still saw the FIIs coming into, building up positions on the net short side.

Therefore, ahead of this event, the Federal Open Market Committee (FOMC) meeting tonight and tomorrow, people continue to build on short positions, which will also add some kind of an upside risk to the market that if the FOMC does not pan out the way the foreign institutions are playing it out to be, one could sit on a risk of a short squeeze.

Q: What do you hear from your clients on the fact that they have not chosen to windup their shorts because the market moved up 150 points, yet we have not seen too much by way of covering. What explains that kind of action?

A: You have to look at it in connection with what has been happening with the rupee. For foreign institutions, the net returns have to be in dollars and the kind of losses that they have seen in dollars, covering that up at this point in time does not yield them as much money. Therefore, we have seen flows going away from the equity space.

We have seen flows going out of debt space and similar constituent build-up on the index Futures side and coupled that with the way the rupee has moved, people are pretty convinced that one could hold on to this move if the market interprets the FOMC talk as quantitative easing (QE) tapering.

Q: Someone earlier mentioned that maybe some of the outflows that we have seen even in the cash market in the last few days from FIIs could be a function of arbitrage withdrawal or arbitrage unwinding because of the way the currency has moved. Do you feel the same?

A: Part of it yes, but that number should then collaborate with net positive flow on the futures side because the arbitrage trade is short on one side and long on the other side. However, that doesn't seem to be the case. So, a small chunk maybe yes, which gets absorbed in the overall bigger picture. But I do not think that the kind of outflows that we have seen is largely due to arbitrage.

The kind of flows that we saw in the last two-three years ever since there has been gush of liquidity, has been on the back of a lot of the emerging markets' exchange-traded funds (ETFs) and that trend is now reversing. One is now seeing that kind of outflow and it falls inline with the other emerging markets as well where one is seeing the trend of money moving out of emerging markets into developed markets.

Q: A lot is dependent upon Fed event but at this point, what kind of markers would you set for the June series because it has been bad for us, the first half of it?

A: The interesting thing on the June series has been, even when the market was cracking up in the first two weeks of June series, if you look at the options data on the upside, you wouldn't see positions chase down the at-the-Money (ATM) strikes to 5,700-5,800. You continued to see 6,000 Call being heavily bid up and that is what it is.

Even today as we trade around 5,820-5,830 odd levels, you see the most open interest still struggle around 6,000 level. So, in case there is a short squeeze post this big event, one could see 6,000 on the cards. I do not see the market going beyond 6,000 levels, but 6,000 is a fair play over the next seven-eight days which are remaining in the June series.

Q: From within the index any specific stocks that stand out either as those that have also seen a big short build-up or that is seeing relative strength compared to the market?

A: One stock in terms of strength that is standing out right now is in the telecom space, Idea Cellular. We have three big names in telecom, Bharti Airtel, Reliance Communications and Idea and each of them has different story. However, the kind of sustain moves that you are seeing in Idea stands out. The stock moved up significantly and there has been reasonable amount of open interest build-up on the name as well and with the stock now trading around Rs 140 odd levels, one could see some more momentum coming around in that space.

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