Jun 22, 2013 01:12 PM IST | Source: CNBC-TV18

Global mkts in selling exhaustion mode; Nifty may fall 3-5%

Udayan Mukherjee, managing editor, CNBC-TV18 expects the NIfty to correct by 3-5 percent in the near-term on the back of weak global markets.

With Indian and US markets ending in red on Thursday and the Dow posting a 350 points fall, a correction that hasn't been seen in the recent past. However, this correction was expected as most Asian markets, including India, fell a lot. Therefore, our market will not pick up the US fall to that extent, believes Udayan Mukherjee, managing editor, CNBC-TV18. 

He sees the Nifty correcting around 3-5 percent in the short-term.

Below is the edited transcript of Udayan's analysis

There is almost a sense of a selling exhaustion out here. Let us see whether we can make something out of a terrible global environment after all.

Globally and locally, things don’t look good at all. One has to keep in mind that when markets fall, in the nature that they fell yesterday, the markets sometimes reach selling exhaustion in the short-term. That is the possibility that one needs to be aware of, that periodically on this journey down, one will get these short covering bounces and they always punctuate, even pronounce downtrends in the market.

Yesterday, the Nifty lost 170 points, so that serious damage has happened already. If we start where the SGX Nifty is suggesting, maybe go down 3-5 percent in just a matter of a days, that is usually termed as selling exhaustion. The Dow has lost 550 points in two days, that is very intense for a developed market. So even there the chances of some kind of a pop back tonight are not very low.

The world is going through a major transition. One can see it showing up in most asset classes. The way gold and silver has collapsed this morning says that some serious adjustments are taking place. The bond yield has shot up to 2.41 percent in the US and nobody saw the bond yield going up this fast, this soon. People were talking of 2.5 percent by the end of this year and we are already knocking on the doors of those kinds of levels.

Huge changes have happened. The disturbing thing for is that emerging market currencies continue to fall. The Brazilian currency, the rand have actually followed up on yesterday’s weakness, which makes one a little worried because there too they are so oversold that one would have expected a bit of a bounce. Yes, things don’t look great, but since they have fallen such a lot, at any point sometime intraday today or Monday one can get one of the bounces and maybe a sharp one at that. I fear though that will get sold into because that is the mode most global investors seem to be in right now.

The markets have seen an ugly punch in the belly that has knocked the breadth out of it. One can analyse this whichever way they want but it tells that markets everywhere or asset classes everywhere were so fed on easy liquidity that despite hints that liquidity will ease away or ease out slowly over a period of time, markets just refused to believe it because they were anchored with that easy liquidity phenomenon. Now, the word is out of the Fed’s mouth, it is like everybody is cram into adjust their positions, they have just woken up to a new reality. It almost seems like that.

With the strongest market falling 500 points in two days, this adjustment will take a while. This is not a one day-two days adjustment. Volatility will be there in the market, one will get 2-3 bad days and then get an up day and that up day will look spectacular as bear market or dead cat bounces do. However, this adjustment, given that it probably involves several billions of dollars in terms of leveraged and carry positions is going to happen over a period of time because a psychological reset is happening now in global financial markets and that never usually plays out in 24-48 hours.

Let’s see how and where this adjustment takes us. Yesterday’s number from global investors is a warning that they probably will need to pull out more in the near-term. So, there is no way to put a finger on which way this damage or where this damage ends, it will be a volatile ride but it seems like we are not done with the pain yet.

Yesterday was a terrible day. What is important is what kind of a bounce we can get and how will investors approach that bounce. So, where we start of the first half of the day and where we end up is going to be very important.

What would be very disappointing price action is if in the morning there is some reconstruction, some of the shorts take profits, maybe the Nifty bounces after a weakish start, say it starts at 5,600 and then there’s an intraday rally all the way upto 5,700 kind of zone and then in the second half of the day that rally fizzles out because of global selling. Then we come down and close very close to where we started of in the morning, that I think would count as a failed pullback if that happens and would count as a very disappointing price action.

See how durable these short covering bounces tend to be and then whether fresh selling is surfacing at every higher level for the market, because people want to sell more and they want to take the opportunity presented by any kind of bump up in stock prices to sell down names again. So, it is difficult to talk about levels, after such a big fall markets may turn volatile for a day or two. 5,500 was the previous low and that remains the target for now. But if global selling continues there is no sanction to that level. Eventually, we could easily pierce below that level.

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