Next 10 days will be cliffhanger for stock markets: Udayan

It was a good 4.5% rally which our market saw last week. CNBC-TV18’s managing editor Udayan Mukherjee says the next 10 days are stacked up and are crucial for global markets.

There is a lot stacked up. First, we have the local index of industrial production numbers (IIP), followed by inflation numbers over the next few days. All of that is then leading up to the climax of the Greek elections, after which we have the Reserve Bank of India's (RBI) credit policy meeting and then the FOMC meet. So the next 10 days are going to be a real cliff hanger for the stock markets which did quite well last week.
Euro zone finance ministers agreed to lend Spain up to 100 billion euro to help its battered banks. The US markets ended higher in thin trading on optimism that the euro zone leaders are moving closer to tackling the crisis.
With bailouts for countries as large as Spain being held up by stock markets, Mukherjee says, "It gives market players an idea, what the frame of mind is of global markets right now."
In the past, fundamentals used to be weak even after regulatory action that was taken was strong. In the short-term, Mukherjee says that the market might see a rally; if regulatory action i.e. political and the central bank (RBI) make some positive moves. Below is an edited transcript of his comments on CNBC-TV18. Watch the accompanying video for more. Q: Some good news came out over the weekend at least for the euro zone but are you getting a sense that there is a bit more risk on the table after last week?
A: Clearly that is the case because Spain is good news this morning, at least for the near-term though it is ironic that bailouts for countries as large as Spain are being held by stock markets. That sort of tells you in a nutshell what frame of mind global markets are in right now. It is fundamentals versus regulatory action. In the near-term if you go back and see these kinds of phases in the past where fundamentals have not been great but regulatory action has been quite strong.
Every time in the short-term, regulatory action has been the one which has determined the course of markets. In the medium-term, fundamentals have always come back if they have been shaky, they will come back to haunt the markets again but in the short-term I think we have seen a bit of the trading rally which might even extend over the next few days if regulatory action from Europe, the US and even in India and China continue to be as strong as the market perceive them to be.
Right now for traders, the key thing is to keep an eye out on what politicians and central banks will do over the next fortnight or so because that will determine what the market does in the near-term. In the medium-term, we are not out of the woods and we have got a long way to wade through our problems but as we were saying a few days back, the near-term is complicated by regulatory action and that might yet extend this rally which started last week. Q: We had a powerful run last week. I guess traders want to see how much more they raise in terms of follow-through after the market moved so fast in such a short period?
A: I don’t think levels will be very important to map because the temptation at such a time is to talk about the 200 day moving average (DMA), the next important support level. It is important to understand the genesis of this rally which is all about regulatory action, the kind of technical snapback which the market is giving you, on the assumption that global regulators, central banks and politicians will put a backstop to the weakness in the financial system and that is where this is coming in from.
So if indeed in the next 10 days you get far more conformation of regulatory action whether it is from the EU or a QE3 or easing from the RBI or the Chinese central bank, if all of this comes into place, it is entirely conceivable that the Nifty will rally beyond what is fundamentally justified at this point in time. This rally is probably not predicated as much on an improvement in fundamentals over the next 10 days but by a feeling in the market that maybe the worst for the near-term in terms of newsflow might be over.
This is because of the kind of consorted regulatory action we might see from politicians and central banks depending on how the outcome of those events are, will determine where the Nifty heads in the near-term. Which is why from the 200 DMA where it closed on Friday, while traders will focus on levels like maybe 5,200, in the near-term it is very conceivable that you get surprised on the way up as you got surprised in January and February by the strength of the Nifty rallying from oversold grounds?
But in the medium-term, I don’t think we are out of the woods. There needs to be a lot more. The best you can say is if events pan out as the market expects it to in the month of June, maybe for the near-term 4,800 on the Nifty is an intermediate base but maybe two-three months down the line, we come back to be haunted by the same fundamental problems, which plague the global economy today. They are not going away in a hurry but in the near-term a backstop might be in place. Q: What about internals because we started getting some money in the middle of the week and that trend started to pick up?
A: That too is telling you that this could be a trading rally and a powerful one at that but not such a fundamentally backed rally because you have had a 4.5% move in the market but the net commitment in the cash market from FIIs has been pitifully low last week – just a couple of Rs 100 crore. So this rally has not been driven by a lot of net cash market commitment or delivery based buying from the global guys.
If you look at the Nifty options plus the stock futures which typically tells you what kind of a trading move has been built up, there the commitment last week was nearly Rs 5,000 crore. So FIIs did not buy a lot in the cash market in stocks, they bought stock futures and they bought index options. It is almost like them saying we are chasing this rally because we believe the regulators will do something in June.
That has always been the case for the June rally but if you look at global markets too, volumes have been very low last week and we haven’t seen cash market commitment this last week despite the 5% move up which tells you that people are positioning themselves for a trading upmove but conviction on fundamentals having restored themselves still remains quite on the lower side.