Markets
FIIs hold shorts ahead of US election results
Summary
- That signals markets are likely to remain under pressure ahead of the US presidential elections on 5 November and weak second-quarter numbers, and any rally could be sold into, said analysts.
Mumbai: Foreign institutional investors (FIIs), whose record sales last month drove down the Nifty by almost 8%, continued to hold cumulative net shorts on Nifty and Bank Nifty futures at the start of the November series. That signals markets are likely to remain under pressure ahead of the US presidential elections on 5 November and weak second-quarter numbers, and any rebound could be sold into, said analysts.
As of last Thursday, when the monthly series expired, FIIs were net short on index futures (Nifty and Bank Nifty) by $1.5 billion against being net long $3.13 billion in the previous expiry (26 September), according to Abhilash Pagaria, head-Nuvama Alternate & Quantitative Research.
On 26 September, the market closed at a record high of 26216.05, from where it fell 7.7% to 24205.35 by last Thursday, the last day of the October series. Diwali on 1 November, when trading ran for an hour through 7 pm—unlike the regular market hours from 9:15 am to 3:30 pm—usually sees token trades by participants.
Alongside shorts of $1.5 billion on the expiry day, FII selloff in the cash market exceeded ₹1.1 trillion in October, a record outflow, which dragged the market down. Buying by domestic institutional investors (DIIs) worth ₹1.03 trillion at lower levels restricted the pullback to 8% in the previous series.
Read more: October surprise: An influx of retail investors hasn’t made FIIs irrelevant
But there is one more indicator of caution: the lower open interest (OI) base of ₹281 billion of Nifty futures contracts at the start of the November series versus ₹451 billion at the start of the October series.
OI refers to the outstanding positions of traders or investors. When markets rise and OI increases, it reflects a bullish sentiment; and when markets fall and OI declines, it implies long liquidation--closing out of bullish bets. Lowering of the OI base reflects caution ahead of the US election results, according to Chandan Taparia, SVP (derivatives & technical research) at Motilal Oswal.
The caution is underscored by a rise in fear gauge, India Vix, which hit an 11-week high of 15.55 on Thursday. The higher the Vix, the higher the uncertainty and vice versa. As the markets fell almost 8% from 26 September to 24205.35 last Thursday, Vix jumped from 12 to 15.55.
“Markets will react to the US election results even as disappointing earnings in the interim contribute to the FII outflows," said Andrew Holland, chief executive officer at Avendus Capital Public Markets Alternate Strategies.
A Trump victory could result in the US markets rallying further, which could have a “positive rub-off on our markets", while a Kamala Harris win could mean “status quo for us", said UR Bhat, co-founder of Alphaniti Fintech.
Citing earnings, also among the reasons the FII profit-booking, Motilal Oswal cut its Nifty earnings per share (EPS) estimate by 1.2% to ₹1,059 for the current financial year in its interim review of the September quarter earnings. The cut is attributed to the underperformance by Reliance Industries, BPCL and Coal India.
Read more: Oversold and overlooked: Emerging opportunities in this fearful market
Nuvama's Pagaria believes that markets could rebound toward 24,750 after the fall in the October series but warns that any bounce could be sold into as the market tilt is to “sell on rally".
Autos could rally 4-5% after strong festive sales and high bearish positions (typically rally driven by short covering), while IT may face some profit taking after its recent rally, he added.
The counterparty to the FIIs, DIIs and proprietary traders is retail and high-net-worth individuals, who hold index futures long worth a net $2.08 billion. In the expiry of the September series, they were net short index futures by $2.2 billion, which they covered and turned net long through October end. Their longs reduced the correction severity and were hedged by selling Nifty and Bank Nifty calls and puts on an aggregate basis.
