Indices fall over 1% after US Fed's warning on Covid-19 spooks investors

Benchmark indices declined over 1 per cent after the minutes of the US Federal Reserve’s (US Fed’s) meeting, released on Wednesday, highlighted challenges to the economy because of the Covid-19 pandemic.

The US central bank’s warning saw investors taking money off the table. The Nifty fell 96.2 points, or 0.84 per cent, to end at 11,312, while the Sensex declined to 38,220, down 394 points, or 1.02 per cent. This was the fourth one-percent-plus fall for the Sensex since July. Foreign investors sold shares worth Rs 268 crore, while domestic institutions pulled out Rs 672 crore, provisional data provided by stock exchanges showed.

Most global stock markets declined as the reality check by the US Fed. “Indian indices along with global markets fell on the back of US Fed’s grim July meeting’s minutes. The Fed cast doubts on the nascent recovery of the labour market seen in the previous months and its sustainability. Markets, globally, were banking on expectations of steady recovery in the major economies and the consequent return to normalcy for businesses,” said Vinod Nair, head of research, Geojit Financial Services.
 

The India Vix index, a gauge for market sentiment, soared 4 per cent to 20.8. The MSCI Emerging Market and Brent Crude fell over 0.5 per cent each, underscoring the risk-off sentiment. The dollar index and the US 10-year yield rose.

 

 

Experts said the minutes have raised doubts about the US Fed’s commitment to an extended period of ultra-loose monetary policy and prompted markets to temper expectations for the next meeting.

“With regard to the outlook for monetary policy beyond this meeting, a number of participants noted that providing greater clarity regarding the likely path of the target range for federal funds rate would be appropriate at some point,” according to minutes of the Federal Open Market Committee’s (FOMC) July 28-29 meeting. The FOMC will meet next on September 15-16.

Most global markets, including India, have rallied sharply from their lows in March. The biggest drivers are record low interest rates and the aggressive bond-buying programme. However, experts believe the market is at risk if the US Fed rolls back its quantitative easing (QE) policy. 

“A faster-than-expected recovery in the developed world could hasten the signalling of a pause of QE by the US Fed in the near future and could be a key risk for emerging market equities. The US Fed balance sheet expansion has stalled since June and has actually dipped marginally in July, which could be an early sign of the pause to the first round of QE during Covid-19,” said Vinod Karki, equity strategist at ICICI Securities, in a note.

Barring four, all members of the Sensex posted losses on Thursday. HDFC and Axis Bank fell the most at over 2 per cent each. Meanwhile, Reliance Industries, ICICI Bank, and HDFC Bank dragged the Sensex lower by 250 points. The gainers list was dominated by state-owned companies. NTPC, ONGC, and Power Grid rose 6.9 per cent, 3.3 per cent, and 2.1 per cent respectively.