IT, pharma, FMCG and private banking are likely to lead pullback rally in case of decline

ICICIdirect

The Nifty has consolidated around 11,300 for the entire week absorbing adverse news flows related to tariff related statements from the US and China.

The Chinese currency has depreciated sharply, which may keep emerging markets currency under pressure for some more time. However, if the pace of depreciation of the Indian currency remains lower it may not have a major negative impact on Indian markets.

Select Nifty heavyweights from IT, pharma, FMCG and private banking are likely to support the Nifty on any intermediate decline.

Volatility has remained lower at 12.5 percent, which shows that the Put writing has increased. Considering the higher Put base at 11,000 strikes, this level should remain an important positional support for the August series.

The higher Put base is getting formed at 11200, which is close to the January high levels of 11,170. The Nifty may spend some time above these levels and should eventually move higher.

This month may see short covering from underperforming sectors amid better than expected quarterly results.

Bank Nifty: 27500 remains an intermediate support for the week:

On the last day of the week, the Bank Nifty saw a V-shaped recovery and ended almost at the day’s high. During the week, the premiums increased significantly while the basis moved above 100 points.

Volatility declined marginally post RBI’s monetary policy outcome where key interest rates were raised by another 25 bps

The short-covering trend continued in the PSU pack whereas profit booking was seen in a few private sector banks post their quarterly numbers. Select private sector banks continued their up move where IndusInd Bank was the star performer.

When the index slipped towards 27,300 on the weekly expiry day, the closure was seen in 27,500 and 27,600 Put strikes.

As the index moved above 27,700, OI blocks were seen in 27,500 Put, which is likely to be the key support, going forward.

On the Call front, in the past couple of weeks, OI blocks are observed in 28,000 strikes, which can be a target for the week,

The price ratio of the Bank Nifty/Nifty remained near 2.44 levels. We continue to feel that support can be seen near 2.42 levels while outperformance can be seen in banking stocks

Chinese Yuan depreciation not over yet, limiting pullback in EM currencies:

Globally, risk sentiments continued to remain volatile. On the negative side, escalating US/China trade war, steepening of DM bond yield curves and a stronger dollar continues to keep China and other EM markets weak.

On the positive side, strong US GDP Q1 print and accretive Q1 earning season in most markets has kept risk-on sentiment alive.

During the weak, the Chinese Yuan depreciated another 0.8% to 6.87 (lowest level since June 2017). This headwind continued to limit a strong recovery in EM currencies while the MSCI EM Currency Index ended just 0.4% lower (just 0.6% higher than 2018 lows).

Hence, the MSCI EM Equity Index also fell close to 2 percent. As the MSCI EM equity lackluster FII flows remained muted as well. Inflows were seen in South Korea ($31 million), Thailand ($100 million) and Indonesia ($90million).

India also saw a marginal inflow of US$70million. Going ahead, trade wars will remain at the centre stage. If China retaliates against the US proposal of imposing 25% tariff on imports worth US$200 billion, then an EM currency war escalation will become likelier.

China, through various ways to retaliate, could further weaken its currency, triggering EM currency weakness (as it is strongly correlated with EM currencies).

However, as the US trade discord with Europe and Nafta members ease, this suggests that US administration is willing to negotiate on reasonable terms.

Additionally, the wage growth number to be released by the US, will be in play. A stronger wage growth number is likely to further strengthen the dollar and rate differential story.