Geopolitical tension, profit booking: 5 reasons why markets corrected today

Rising political tension between India and China was one of the key reasons that punctured the momentum on Monday. The S&P BSE Sensex ended 839 points, or 2.1 per cent, lower at 38,628 levels

After an initial burst on Monday morning that took the S&P BSE Sensex to the day’s high of 40,010.17, the markets lost ground as trade progressed. The S&P BSE Sensex lost over 1,614 points from the day's high and hit a low of 38,395.89 levels. It, however, recouped some of the loss and closed 839 points, or 2.1 per cent, lower at 38,628 levels.

Here are five key reasons that led to the market fall on Monday.

India-China geopolitical tension: Rising political tension between India and China punctured the morning momentum on Monday. According to reports, the situation in Eastern Ladakh flared again on the intervening night of August 29/30 when troops of China's People's Liberation Army (PLA) violated the "previous consensus" arrived at during military and diplomatic engagements. Following the development, the Srinagar-Leh highway has been closed for civilians, reports suggest. READ MORE HERE

Rate sensitives correct: Though there was across-the-board selling, financial sector stocks corrected the most on Monday with the Nifty Bank index, a gauge of the performance of private banks on the National Stock Exchange (NSE) falling over 3 per cent. A similar fall was visible in auto and real estate indexes. Federal Bank and RBL Bank (down over 6 per cent each); Bosch, Motherson Sumi and Eicher (down 5 – 7 per cent); and DLF, Sobha, Prestige Estates (down 5.5 – 7 per cent) were among the top losers in the rate sensitive pack. 

“With inflation likely to remain elevated and uncertainty on the trajectory, analysts expect the monetary policy committee (MPC) of the Reserve Bank of India to keep policy rates unchanged. “This could also cap incremental liquidity easing measures (OMOs/monetisation), which markets have been pricing in given the government borrowing overhang,” says Upasna Bhardwaj, economist and senior vice-president at Kotak Mahindra Bank.

Profit booking in mid-and small-caps: The fall in the mid-and small-cap index was brutal. Both these indexes lost 3.8 per cent and 4.1 per cent, respectively as compared to 2.7 per cent fall in the S&P BSE Sensex in late noon deals.

"Our worry is compounded by the fact that valuation bubbles are created in several small and mid-cap (SMC) stocks by retail investors. Many small stocks without any revenues for over three years have also rallied to record levels. Once 'smart investors' take out their profits in such SMC stocks, the domestic market could see some pain," cautions G Chokkalingam, founder and chief investment officer at Equinomics Research.

Nervousness ahead of June quarter GDP data: Market participants also took home some profits ahead of the data for April – June 2020 quarter gross domestic product (GDP) to be released today post market hours. Economists project GDP might contract 19.2 per cent in the April-June quarter from a year ago, the sharpest decline since the nation started publishing quarterly figures in 1996. READ MORE HERE

“For Q1FY21, we expect the statistics office to announce a GDP contraction of around 17.5 per cent y-o-y,” wrote Pranjul Bhandari, chief economist at HSBC Securities and Capital Markets in a recent co-authored note with Aayushi Chaudhary.

New margin rules: New margin rules are set to kick-in from Tuesday, September 1. Markets regulator Securities and Exchange Board of India (Sebi) has declined to extend this deadline. Reports suggest brokers are not technically prepared to roll out the proposed framework and are seeking a month’s extension to implement the same. READ MORE HERE

"In today’s virtual meeting, Sebi declined to grant extension of further time in implementing margin pledge / re-pledge process. This came as a big surprise to Association of National Exchanges Members, India (ANMI) and its 900 members. ANMI is holding consecutive meetings with all stakeholders and studying all options available to it in the matter," an ANMI spokesperson said in an emailed note.

Sensex Heat Map: Gainers and losers