Mixed Fed signals rattle markets

Sensex drops over 400 points, Nifty declines 124 points

Stock investors continued to flip-flop amid confusing signals from the US Federal Reserve on the outlook for its massive bond-buying programme—Quantitative Easing (QE) 3. Domestic equities slumped on Thursday, tracking losses in other Asian markets, after minutes of the American central bank’s October meeting revealed the monetary stimulus could be trimmed in “the coming months”.

Fed officials, in the minutes of the meeting released on Wednesday, said they “generally expected the data would prove consistent with the committee’s outlook for ongoing improvement in labour market conditions and would, therefore, warrant trimming the pace of purchases in coming months”.

Investors construed this as an indication of an earlier-than-expected QE3 withdrawal, resulting in foreign institutions turning net sellers for the first time in 34 trading days. Foreign institutional investors (FIIs), which have not been net sellers since October 3, sold to the tune of about Rs 60 crore on Thursday, according to provisional data. Recent comments from Fed chairman nominee Janet Yellen and outgoing chairman Ben Bernanke that the stimulus would be retained in its current form till the US economic recovery picked up were cheered by the markets, sparking a rally in stocks last week. (Click here for tables)

The BSE Sensex fell 406.08 points, or 1.97 per cent, to close at 20,229.05. The National Stock Exchange Nifty declined 123.85 points, or 2.02 per cent (its biggest single-day percentage fall in nearly two months), to close at 5,999.05.

Among BSE stocks with high foreign ownership, ITC fell 2.59 per cent and Housing Development Finance Corporation dropped 3.61 per cent. Among other blue-chip companies, Reliance Industries fell 1.7 per cent, Larsen & Toubro lost 2.9 per cent and ICICI Bank closed with a loss of 2.11 per cent. Infosys fell 1.62 per cent, adding to its 1.2 per cent loss on Wednesday, after hitting the highest level in nearly three years on Tuesday.

Dabur India rose 2.26 per cent, as dealers cited attractive valuations after the recent underperformance.

“The market hates uncertainty, as it causes unwanted choppiness across the board. From the time the tapering issue came into the picture, we have been seeing these erratic reactions every now and then,” said Jayant Manglik, president (retail distribution), Religare Securities.

Recently, the US has seen improvement in its economic data. A good jobs report for November would increase the likelihood of the Federal Reserve starting to scale back bond buying at its meeting next month, a senior Fed official said on Wednesday, according to a Reuters report. “It is definitely on the table, but it is going to depend on the data,” James Bullard, president of the St Louis Federal Reserve Bank, told Bloomberg television. “A strong jobs report, I think, would increase the probability for a December taper,” said Bullard, a voting member of the Fed’s policy-setting committee.

“Introduction of more fiscal reforms and effective implementation of the reforms are prerequisites for the markets to sustain their current valuations and improve upon those,” said Dipen Shah, head (private client group research), Kotak Securities.

Bank stocks led downsides on Thursday, with the bank Nifty index dropping 2.4 per cent, as jumpy traders unwound their bullish bets on lenders.