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Informist, Monday, Nov. 18, 2024

By Anjana Therese Antony

MUMBAI – What made information technology stocks take a U-turn from their two-week rally was the US Federal Reserve chairperson's comments about a likely slower trajectory of rate cuts in the short term, directing bears to the derivatives segment of domestic IT players Monday. The view that the US Fed is not in a hurry to cut rates left investors surprised, as they were expecting interest rates to be trimmed in the coming meetings. Premiums on deep out-of-the-money call options of most IT companies declined sharply and those on put options rose, hinting at the continuation of their southward journey in the near term. 

"The economy is not sending any signals that we need to be in a hurry to lower rates," US Fed Chair Jerome Powell said at an event in Dallas. Powell also reiterated that US inflation should sustain at the apex bank's target of 2% to move its monetary policy to a more neutral setting over time. In the last two weeks, IT stocks in India have gained, while the entire market fell, particularly due to optimism around lower rates in the short term as well as likely favourable policies under the US president-elect Donald Trump, when he takes over the White House in January.

The CME FedWatch Tool now shows a 61.9% possibility of the US Fed reducing interest rates by 25 basis points, compared to 76.8% expected a month ago. The Fed had reduced the federal funds rate by 25 bps in November and by a sharp 50 bps in September. High interest rates was one of the reasons, other than muted demand scenario and sharp reduction in discretionary spending by clients, which put IT companies in a tight spot for more than a year. 

Shares of IT companies such as Wipro, LTIMindtree, Infosys, and Tata Consultancy Services closed 2-3% lower. In the options chain of the worst-hit TCS, which closed at INR 4,019.50 on the National Stock Exchange, premiums on INR 4,100-INR 4,550 call options expiring Nov. 28 declined 35-72% and those on INR 4,000-INR 3,700 put contracts increased a whopping 90-230%. The maximum open interest addition was at the INR 4,200 call and INR 3,800 put contracts. Similarly, premiums on deep out-of-the-money call options of other large-cap companies such as Infosys and Wipro tumbled and those on put strikes increased. 

The fall in the IT space primarily pulled the overall market lower Monday. The Nifty 50 and the Sensex closed 0.3% lower at 23453.80 points and 77339.01 points, respectively, extending the fall to the seventh consecutive session. Near-term support for the 50-stock index is pegged at 23300-22250 points and resistance at 23550-23650 points, according to a technical and derivatives analyst at a domestic broking firm. 

The domestic market has been falling since October due to foreign outflows, a slowdown in earnings growth, downgrades in estimates of earnings growth and earnings per share, rising US Treasury yields, and expensive valuations, among other factors. Experts had reiterated that the Indian stock market would see lower returns this year compared to two-three years ago. Analysts said they anticipate this weakness to continue in the near term, so investors can start buying at a comfortable valuation. 

Foreign investors net sold equities worth nearly $11 billion in October, the highest monthly offloading seen in the domestic market ever. So far in November, they have net sold shares worth $2.15 billion. 

--Nifty 50 Nov closed at 23513.15, down 88.55 points; 59.35-point premium to spot index

--Nifty 50 Dec closed at 23665.00, down 80.20 points; 211.20-point premium to spot index

--Nifty 50 Jan closed at 23820.00, down 87.70 points; 366.20-point premium to spot index

National Aluminium Co., Reliance Industries, HDFC Bank, Infosys, TCS, Hindalco Industries, Tata Motors, Hero MotoCorp, State Bank of India, Hindustan Aeronautics, Vedanta, and ICICI Bank were the most actively traded contracts.  End

US$1 = INR 84.3850

Edited by Avishek Dutta

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