Markets poised for an FPI short-covering rally ahead of Diwali

PALAK SHAH Mumbai | Updated on October 14, 2019 Published on October 13, 2019

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FPI net short 54,000 futures contract; Fed stimulus, US-China trade war thaw also to be triggers

Ahead of Diwali, there might be another sharp rally in the stock markets before the expiry of the October series derivatives. This will be because foreign portfolio investors (FPIs), the largest players in equity futures and options (F&O), seek to cover their huge net short positions this month, experts told BusinessLine.

They said the trigger for the short-covering could be the two key US announcements on Friday that came after the markets closed — the launch of a quantitative easing (QE)-like bond-buying programme by the Federal Reserve, and a partial trade deal between the US and China.

Short net positions

FPIs still hold net short positions of around 54,000 contracts in India’s equity futures segment, data from exchanges showed. This was more than 1.2 lakh futures contracts last month and a short-covering was triggered by the government’s September 20 tax bonanza to the corporate sector. The previous bout of short-covering had led to an 8 per cent rally in just two trading sessions.

In October, the trigger could be the softening of the US-China trade row and a QE-like move by the US Fed, experts said. Out the total outstanding in the options segment, the FPIs are net 15 per cent short (the position being net ‘calls’ sold and ‘puts’ bought). The same was around 35 per cent last month.

“An extreme bearish sentiment combined with huge FPI net short position is a prefect recipe for a big market rally. This was clearly evident in September,” said Rohit Srivastava, Founder and Chief Strategist, Indiacharts. “October is no different. Sentiments are extremely negative on the street and FPIs still hold huge F&O shorts. The trigger to cut these shorts came in last Friday from the US, the largest market in the world that witnessed a sharp rally on anticipation of positive news that was announced after market closing. With all this, the next two weeks may see some high-voltage action,” he said.

Fed’s bond programme

The Fed said on Friday it would begin buying government-backed securities to expand its balance-sheet, a move meant to keep an obscure but critical corner of the financial markets functioning smoothly, as the New York Times reported.

Though the Fed was not terming its new bond programme that would go on for nearly a year a ‘QE’, markets view it as a stimulus as the US central bank will now increase currency flow in the financial system in contrast to sucking out liquidity.

A key clause of what the US government is calling a ‘phased trade deal’ is that China should refrain from currency manipulation. Indiacharts’ Srivastava believes this will lead to the Chinese yuan appreciating against the dollar and more money moving to emerging markets. So far, China has allowed its currency to depreciate against the dollar to ward off the effects of the trade tariffs imposed on it. US and European markets had rallied over 1 per cent on Friday.

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Published on October 13, 2019
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