Investors poorer by Rs 3 trillion; key reasons for today's market fall

The US Federal Reserve has indicated that they will begin hiking interest rates in the near future and that there will be multiple rate hikes this year.

Bear hammering on Dalal Street wiped off nearly Rs 2.6 trillion worth of investor wealth on Thursday as seller came  back on the Street, after a day's break, on the back of the US Federal Reserve's hawkish stance.

The BSE Sensex index tanked over 1,400 points in intra-day deals to hit a low of 56,439 while the Nifty50 slipped below the 17,000-mark and hit a low of 16,867. However, the indices recovered in the fag-end of the session to end 581 points and 168 points down, respecitvely, at 57,277 and 17,110.

In the broader markets, the BSE MidCap and SmallCap indices slumped 2 per cent and 1 per cent, respectively.

READ ALL THAT HAPPENED IN THE MARKETS TODAY

"The Federal Reserve has indicated that they will begin hiking interest rates in the near future and that there will be multiple rate hikes this year. Along with that, the Fed has also stated that they will end the asset purchase program in March and will also look to reduce the size of the Fed Balance Sheet from sometime later this year. The combination of these measures is what has spooked markets globally as it would mean moving from a scenario of easy and excess liquidity to a scenario of liquidity tightening," said Sameer Kaul – MD & CEO at TrustPlutus Wealth.

Mohit Ralhan, Managing Partner & Chief Investment Officer of TIW Private Equity, meanwhile, added that a large section of market participants were still considering three policy hikes in their calculations. They have now moved beyond it and joined the four rate hikes bandwagon. The emerging markets will feel the pressure as liquidity gets eroded. FII’s have been net sellers in the Indian market and the US Fed’s increasingly hawkish stance is expected to continue putting selling pressure in Indian markets.

That said, this is liquidity-driven and un-correlated to domestic factors of economic recovery and growth. Therefore, the impact is expected to act as a stabilizing event and the long-term bull run in India is likely to continue based on local macroeconomic factors, he said.

Here's what's spooking the market:

US Fed's hawkish stance

Concerns that the Fed will increasingly prioritise fighting inflation walloped global share markets. In its latest policy update on Wednesday, the US Federal Reserve indicated it is likely to raise US interest rates in March, as has been widely expected, and reaffirmed plans to end its bond purchases that month before launching a significant reduction in its asset holdings.

Given this, the policy-sensitive US 2-year yield jumped amid expectations of Fed tightening, rising to a top of 1.1780 per cent in morning trade in Asia, a level last reached in February 2020. The benchmark 10-year yield also ticked up from Wednesday's close, rising to 1.8548 per cent from 1.846 per cent.

"Global stock markets, including India, rallied on liquidity support due to low interest rates. Historically, too, markets have negatively reacted to increase in interest rates, especially by the US Fed. So, we can expect more correction over the medium term as liquidity winding down begins," said AK Prabhakar, head of research at IDBI Capital.

Expensive valuation
Despite the recent correction, Indian equities continue to remain expensive when compared to other global peers. he Sensex is currently trading at a trailing price-to-earnings (P/E) multiple of 26.3x -- nearly twice the MSCI Emerging Market's P/E of 13.9X and around 40 per cent higher than Dow Jones' 19.1x. READ ABOUT IT HERE

"Stocks, especially in the broader market, are trading at lofty valuations. Despite the recent price correction, many of them are creamy and can see more downfall if the negative sentiment persists," said Prabhakar.
 

Oil on the boil

Soaring Brent crude prices, which are gradually moving towards the $100 per barrel-mark, also soured the mood on the Street. Supply crunch amid tensions between Russia and Ukraine pushed crude prices above $90 per barrel yesterday, a level last seen in October 2014.

However, on Thursday, global benchmark Brent crude eased 0.8 per cent but remained just below $90 per barrel at $89.17. US West Texas Intermediate crude was down 0.9 per cent at $86.55 per barrel.

That said, this may be a temporary relief for investors as analysts expect Brent to hit $125 per barrel.

"War will result in elevated risk-premiums and higher transit costs. On that basis, oil may hit $125 and natural gas $200 in per barrel of oil equivalent (BoE) terms. Assuming all countries halt purchases of Russian energy, the potential price impact would be huge, with oil rising to $175 a barrel and European gas to $250," wrote Michael Every, global strategist at Rabobank International in a recent note. READ MORE

Rising Dollar

The dollar rose to a five-week high on Wednesday after the Federal Reserve said it is likely to raise US interest rates in March as expected and later launch a significant reduction in its asset holdings.

The dollar index, as measured against six major trading currencies, rose to a high last seen on November 22.

Weak Asian markets

Asian shares fell to their lowest in more than 14 months on Thursday with MSCI's broad gauge of regional markets outside Japan down 1.6 per cent at its lowest level since early November 2020.

Hong Kong's Hang Seng index and Australian shares fell 2 per cent and Chinese blue-chips were 0.2 per cent lower. In Tokyo, the Nikkei fell 1.9 per cent, touching its lowest point since December 2020.

Subdued Q3 earnings

Corporate earnings in the December 2021 quarter (Q3FY22) have started on a muted note for India Inc with lower-than-expected growth shown by early-bird companies. The combined net profit of 140 early-bird companies is up 10.4 per cent year-on-year (y-o-y) during October-December 2021, growing at its slowest pace in the last five quarters.

For comparison, these companies’ earnings were up 19.7 per cent y-o-y in Q2FY22 and 21.6 per cent during the third quarter of FY21. READ ABOUT IT HERE

Budget nervousness
Unlike past trends, markets are entering the Budget session on a subdued note and there doesn't seem to be any nervousness around the event, analysts believe. 

"Budget is just a one day event and the long-term market trajectory doesn't depend on it heavily. Yes, certain sectors do see movement where announcements are made but the event per se can't define the market movement," said Gaurang Shah, senior VP at Geojit Financial Services.

Technical outlook

Nifty is trying to find its feet near a strong support zone of 16,850-16,600 after a brutal fall. Technically, 16,800 is long-term trendline support and a previous demand zone while 200-DMA is placed around 16,600 level. "Therefore, we can expect a pullback rally from here. On the upside, the 17,500-17,600 area will be the first resistance zone while above 17,800, we will get confidence that the market has reversed and is ready to go higher," said Parth Nyati, Founder of Tradingo.