Covid, global cues will weigh on stocks

Spooked by continued high number of Covid cases, increased number of States going for lockdown, fears of higher US inflation and interest rate hike in the US due to increasing commodity prices; markets corrected during the week ended.

After rising around 3 percent in previous two consecutive weeks, the Sensex corrected 473.92 points to close at 48,732.55, and the Nifty declined 145.35 points to 14,677.80. The broader markets corrected less than frontline counters. The BSE Midcap index declined 0.49 percent and the BSE Smallcap index was down 0.08 percent.

After selling nearly Rs 12,000 crore in April, FIIs are net sellers to the tune of Rs 8,700 crore in the month of May till date. Buying from DIIs was also subdued with purchases of just Rs891 crores till date in May against the buying of Rs 11,360 crore in April. Indecisiveness among the institutional players and inflation worries from US dragged sentiment.

Volatility due to inflation fears and uncertainty over the second wave of Covid-19 kept market participants on their toes in the week ended. After a gap of more than six months the next Goods and Service Tax Council meeting is being convened on May 28.

As per GOI projection, the shortfall was expected to be Rs 1,56,164 crore in 2021-22, without taking into consideration the impact of Covid Wave-2. IIP rose by a sharp 22.4 per cent in March after two months of contraction, helped by the year-earlier low base due to the first Covid wave. Retail inflation eased to a three-month low in April to 4.29 per cent from 5.52 per cent in March due to softening food prices.

The latest pandemic wave is expected to significantly moderate the sharp rebound in GDP growth that was expected in the first quarter. Most high-speed indicators such as automobile sales, mobility indices and e-way bills have shown a decline in economic activity. Former RBI Governor Raghuram Rajan indicated that Covid-19 pandemic is probably India's greatest challenge since independence and added that in many places the government was not present to help the people for various reasons.

Economy observers expect GoI to come out with a "new" stimulus package to annul the impact of Covid second wave on economy. Important companies that will release their earnings in the coming week are Bharti Airtel, Tata Motors, Hindalco Industries, State Bank of India, Shree Cement, Indian Oil Corporation, HPCL, Federal Bank, Aarti Industries, Canara Bank, Zee Entertainment Enterprises, JSW Steel, United Spirits, Amara Raja Batteries, and Amber Enterprises India. Market players expect the stock-specific action to continue given the quarterly earnings season, and feel the market will closely watch Covid-related updates, progress of the vaccine drive, global cues and movement in commodities.

Futures & options / sector watch

On the back of earnings, derivative segment continued to witness sharp stock specific moves. Nifty closed below 14700 levels while Bank nifty managed to take support at its 100 days exponential moving average and ended the week above 32000 levels. Option segment witnessed maximum Call open interest at 15,000 strike, followed by 15,300 and 14,900 strikes; and maximum Put open interest was seen at 14,000 strike, followed by 14,500 and 14,600 strikes.

Call writing was seen at 15,000 strike, followed by 14,900 and 15,300 strikes, while Put writing was seen at 14,600 strike, followed by 14,400 and 14,700 strikes. The Implied Volatility (IV) of calls closed at 18.64 per cent while that for put options closed at 19.75 per cent. The Nifty VIX for the week closed at 20.08 per cent. PCR OI for the week closed at 1.52 indicates more puts writing than calls. Option data indicates a wide trading range for the Nifty between 14,400 to 15,000 levels for coming sessions.

Spooked by fears of impact of rising Covid cases on business and economy, banking stocks witnessed selling pressure. State Bank of India would be reporting earnings on May 21. It is expected to report strong earnings growth for the March 2021 quarter on the back of decline in provisions, and strong net interest income & pre-provision operating profit. Punters expect rebound in bank counters. Buy ICICI Bank, SBI, PNB, Canara Bank and BOB. Stock futures looking good are DLF, ICICI Bank, PidiliteInds, Powergrid, REC, Tata Consumer and Zee Entertainment. Stock futures looking weak are Cholamandalam Finance, Indus Tower, Muthoot Finance, PEL and Naukri.

(The author is a stock market expert. He is former vice chairman of AP Planning Board)