Markets see turbulence after Wall Street rout, volatility may spike

Sensex revives after decline of 460 points; concerns fueled by political and economic uncertainties in America

The rout on the Wall Street, amid friction between US President Donald Trump and the Federal Reserve over interest rate tightening, has led to turbulence in global equities. The benchmark Sensex on Wednesday declined 460 points, or 1.3 per cent, but managed to rebound to close 180 points higher at 35,650. Concerns continue to linger despite the positive close, fueled by political and economic uncertainty in the world’s largest economy. 

The Nifty ended at 10,730, up 66 points or 0.62 per cent. Asian markets ended mixed, with Japan’s Nikkei 225 gaining close to a per cent following a 5 per cent drop on Monday, while the South Korea and Singapore markets declined more than a per cent. Gold prices, meanwhile, rose to $1,272 per ounce from $1,256 on Friday, on the back of safe-haven buying.

Most global markets, including those in Europe, were shut for holidays. Meanwhile, the US futures market pointed to a positive opening on the Wall Street, following a 3 per cent drop on Christmas Eve that pushed most US benchmarks into bear territory. Security is said to enter the bear market after a fall of 20 per cent from its recent high. The US President has openly criticised the Fed, saying the central bank was “raising interest rates too fast because they think the economy is good. But I think that they will get it pretty soon.”

The comments, which came when the US market was already in the midst of sharp correction, fueled further concerns over weak economic growth. The S&P 500 index has declined nearly 20 per cent in the past one month. The weakness in the US market has also weighed on global oil prices. Brent Crude prices fell below $50 a barrel on Monday, for the first time since July 2017. 

The dollar index, a gauge that tracks the performance of the dollar against major global currencies, has declined to 96.75 from 97.54 earlier this month. The 10-year US bond yield has dropped to 2.75 per cent from 3.23 per cent last month. The Indian market, too, has seen volatility on account of the fall in US markets. The fall in oil prices, US bond yields, and weakness in the dollar is seen as positive for the Indian economy. 

Source: Bloomberg | Compiled by BS Research Bureau

“In India, oil prices are very important for the health of the economy. Oil prices have come down quite a lot due to the turmoil in the US. Even the rupee and 10-year bond prices have gained. This has somewhat helped sentiment. Market players believe India will be affected dramatically in the short term by what happens in the US,” said U R Bhat, director at Dalton Capital Advisors. The rupee on Wednesday closed at 70.07, compared to the previous close of 70.14. The 10-year benchmark government bond yield ended at 7.26 per cent, as compared to its previous close of 7.29 per cent.

Market players say the real reaction in the market to the US problems will be clear once trading resumes in Europe and other Asian markets on Thursday.

Due to Christmas holidays, volumes were lower than usual in the domestic market. The combined cash market turnover stood at Rs 300 billion against the 30-day average of Rs 340 billion. Trading activity by domestic as well as foreign investors was tepid.

Some experts said the rebound in the market could be due to short-covering ahead of expiry of the December series derivatives contracts on Thursday. India has outperformed most global markets in the latest sell-off. Currently, the Sensex is down just 8 per cent from its all-time high, even as most global markets have slipped into the bear market territory.

Experts say emerging markets (EMs) like India could perform better than the developed markets next year. 

“We also see a favourable environment in India and Indonesia from an anticipated acceleration of growth, greater divergence with developed market growth, and solid capital inflows,” said Nomura in a recent note titled Asia 2019 Outlook.