External worries spook markets

Fed rate rise hint and Greece default warning lead to benchmark indices sliding a bit, triggered by some disappointment on corporate results

Shares slipped by a little over one per cent on Monday, on worry that the US Federal Reserve might raise interest rates sooner than later, reversing the liquidity flow from emerging markets to the developed markets.

A warning by Greece that it could default on $1.7 billion of debt repayment due next month also sent shockwaves across financial markets. India’s benchmark indices on Monday fell the most in two weeks, led by declines in metal and consumer stocks. The S&P BSE Sensex ended at 27,643, down 313 points or 1.1 per cent, the most since May 12. The National Stock Exchange’s 50-share Nifty benchmark declined 88 points or 1.1 per cent, to end the day at 8,370.

The US and UK markets were closed on Monday on account of a trading holiday but the US market had ended lower on Friday, after Janet Yellen, the US Fed chief, announced the central bank’s intent to raise rates for the first time in 10 years. Indian stocks mirrored Asian and European markets, which traded weaker on account of the worry about whether Greece would be able to honour the payment to be made to the International Monetary Fund by June 5.

“The US Fed has said nothing new as such but the US and Hong Kong markets did react negatively to the news. Plus, this being the expiry week, some volatility is expected in the market,” said Gautam Chhoacharia, head of research (India), UBS. The derivative expiry session will be on Thursday.

While the US Fed has been hinting at a rate rise, the timing is unspecified. Yellen's speech made it clear the rise would happen this year if US economy data continued to show improvement. Experts said that given the current nervousness about the market direction, investors were using any opportunity to pare their gains in stocks which had run-up quite sharply in the past one-year period. “Individual stocks are priced to perfection or are slightly over-valued. Investors are also being cautious and the expectation from the government and corporate earnings has moderated. But the markets will remain volatile for some more time to come,” said Vinay Khattar, associate director, Edelweiss.

The Sensex and Nifty started the day in the red but saw a sharp fall during the second half. “The fall appeared to coincide with Europe opening, where news of Greece defaulting on its June tranche of IMF repayment has caused selling across stocks & bonds. However, cash volumes were 30-35 per cent lighter than usual, so the impact might have been exaggerated. Some results over the weekend, like SBI & ITC, were disappointing and these stocks led the fall,” said S Hariharan, head of sales trading (institutional equities), Emkay Global Financial Services.

ITC announced weak March quarter numbers, disappointing the markets. A heavyweight in the indices, it fell 3.3 per cent to Rs 317.65 on Monday, dragging down the S&P BSE index for fast moving consumer goods by 1.6 per cent. For every stock that gained, five declined in the Sensex on Monday.

Institutional participation in the market also fell on Monday. Foreign portfolio investors were net buyers of Indian equities at Rs 74 crore and domestic institutional investors at Rs 0.17 crore. Market participants said institutional participation had been on the wane after the recent sharp falls and volatility in the past two months. “On the institutional side, we are not seeing too much participation. It has already come down and chances are that it could reduce further if the market continues to remain uncertain,” said Piyush Garg, executive vice- president, ICICI Securities.

Analysts expect the Nifty to trade in a range, with the upside capped at 8,500, while the downside could go as low as 8,000, some believe.

The near-term trigger could be in the form of a rate cut by the Reserve Bank of India. The consensusis for a 25 basis points cut in interest rates in RBI’s June 2 policy review meet. “There is an expectation that a rate cut could happen. If it does not come through, the markets could react negatively,” said Khattar.