It’ Monday morning and it’s the week of the crucial Fed meet. Markets have paused in anticipation of that meeting for a number of weeks now. On Friday, there was a flutter in London. But nerves this morning would have settled a bit particularly after what happened in the US. The markets are focusing on this crucial Fed meet and this will drive us in the near-term.
Our markets and FOMC meet:
I think we will wait and watch for the next couple of days because we have waited for two-three weeks obsessing about this event, 0-25-50 bps and so I suspect today and tomorrow we will speculate some more on what might come through from the Fed and then take our call Wednesday morning onwards.
I do not think that it is such an earth shattering event but the market fixated on that so the market will think about it for two more days and we will probably see a sharp move either way on Wednesday. Maybe tomorrow the markets might chose to go just a bit light or both on the short and the long side because chances are that you will probably see a gap down or gap up on Wednesday morning.
Asian Markets:
The US was quite flat on the Friday. Japan is shut today but China is doing very well 1% up. Straits Times down 0.5%, Kospi is down 0.5 %, Hang Seng is just up above a little bit, Taiwan is down more than 1%, more down than up more red than green but not a hugely conclusive cue from the Asian set this morning.
On trade:
I think it is fairly straight forward, the way the markets are positioning itself atleast for the event, on Wednesday morning you know what to do, if there is no rate cut then there is a bit of a global problem, at least in the near-term there will be a sell off and we will probably sell off as well.
The market has positioned quite interestingly right now it needs a trigger to go up or go down having rallied so far and if there is no rate cut then that is a trigger to go down so in the near-term the markets might correct a bit. If the cut is only 25 bps, which seems like a very likely scenario then globally the markets might just get a bit disappointed because there is a fair expectation of 50 bps out there. So globally I suspect the markets might correct a little bit if there is only 25 bps at least in the US.
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We may correct a little bit in sympathy but my guess is that the market is looking quite strong right now, the undercurrent is fairly strong in India so if it is 25 bps I think after a day or two our markets will probably approach it by saying the event is out of the way, it is not terribly bad news, let the US sulk but let us get on with our business.
I suspect if it is 25 bps, we may correct with the global markets if they do correct for maybe half a day or one day or couple of days maximum and then we will probably start bouncing back so you will probably not see a very deep cut in India at least if there is 25 bps cut. If it is a 50 bps cut, all global markets rally, we take out new highs and go to much higher levels so.
I think there are only three scenarios which were possible out here and the reactions to them are very straight forward but as a trader, do you want to stick your neck out and take your call on that, if you are a brave man you will but Wednesday the chances of the market doing 250-300 points either way is very high so that possibility have to keep in mind as you trade today.
Is the under current edgy on back of Northern Rock news?
There was a bit of edginess for sure but I think the market dealt with it pretty well. We sold off a bit of a highs of the days going into a weekend as well but frankly I was watching the US market more closely on how they would digest that bit of news remember last time the news came in BNP Paribas the whole world went into a bit of a tizzy as if the world has come to an end.
Friday looked fairly stable and sane out there despite the problems of Northern Rock so I think now you have been the bit of a time here you are ok. You deal with a news slow bit better but it this tells you one thing this 25 or 50 bps whatever comes through on Tuesday, it maybe a short term fix trigger for the market but if you are worried about what's happening globally, then I think your worries should not end with what happens on Tuesday. If you are bullish about the global markets and a particular scenario playing out then Tuesday will not change everything.
I think in the next 3-6 months the global markets have issues to deal with, which do end or start with what’s going to happen on Tuesday’s Fed meeting. The way the markets are positioned right now, as if that whatever the steps the Fed takes is absolutely the complete decider of the global situation is like 3-6 months from now. I think some of these problems are lingering they are still in the system.
They will probably come back to haunt you periodically. The short point is that in the near-term the18th of Sep is a big trigger but I think it may just get forgotten unless there is something far more overreaching like the Fed hinting that there is big cycle of cuts that they have to take right now. That’s something far deeper and far more meaningful but otherwise I don’t think this Fed action is such a big think for the global market.
If you are worried you should be continue to be worried for the next 3-4 months because you seen that the small things are still coming out of the system.
Are we a bit stronger?
We have been very strong for the last few weeks but the markets have reached a point where it needs something else to either move up or move down. Opinion is a bit divided at 4,500 Nifty, some people believe that you have come from 4,000 to 4,500, the market is not ready to take out old highs by a significant margin and therefore there should be a bit of a give back that is one view.
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If the news from the Fed meeting is bad, that view will gain currency, the bears will get active and they will try and push the market down because they will have more ammunition to play with. There is another camp in the market which believes that there is lots of worry in the market, there is plenty of skepticism and the market typically will climb these walls of worry and go on to new highs, maybe even by a significant margin and that view will gain more currency if the news is good on the September 18 and the bulls will use that news to push the markets into new highs.
We are at a bit of a crossroads right now and at crossroads you have got an important event. So the event will trigger off, which way you are headed and you can probably easily find maybe a 250-point kind of move in either directions from the Nifty quite effortlessly. 4,500 if the news is good you can go ahead in one shot maybe over a few days to 4,750-4,800, if the news is not good then you can get pegged back to 4,200-4,300 quite easily as well.
It is interesting that if you buy that 4,500 call and put today, the straddle for the uninitiated, you have got to pay Rs 168 only. I thought it would become a bit more expensive because I think you can say with some degree of certainty that if the news is one way or the other then the market will probably move more than 200 points on the Nifty and the options market might just have been factoring that in making it expensive to make money on the straddle but it is Rs 168 and I suspect that you will probably get more than that depending on how the news pans in.
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