Three reasons that triggered a 1,100 points fall in Sensex today

The Sensex and Nifty benchmark indices plunged on Friday after ending flat in the previous session as policymakers across the globe aggressively paddle on monetary policy tightening.

The Sensex tanked 1,115 points to day’s lowest level of 54,587 and the Nifty50 shed 342 points to slip to 16,341. This was the benchmarks' lowest level in two months.

Record-high inflation levels, dented prospects of corporate profitability and likelihood of contraction in economic growth continue to batter equities, which, according to analysts, are set to remain volatile in the near-term amid global liquidity withdrawal.
 

"The single important factor roiling global equity markets is the reemergence of inflation as a major threat and market's scepticism over the central banks' ability to contain inflation without triggering a sharp economic slowdown,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Investors should remain calm in these turbulent times without taking aggressive positions. Calibrated buying on declines in small quantities in high quality stocks with preference for value over growth would be a good investment strategy, he added.

Meanwhile, here’s a rundown of key factors that are paining equity markets:

Global market sell-off: Domestic equities tanked in intra-day trade as US markets sank overnight on fears of aggressive measures that the Fed may take to curb inflation and subdued earnings. The Nasdaq posted its worst single-day fall since 2020, plunging 5 per cent at close. The Dow Jones lost 3.12 and the S&P 500 fell 3.56 per cent. This was a sharp reversal from a day before when the markets had surged after the US Fed delivered an in-line 50-bps rate hike, assuring that a 75-bps increase was not being actively considered. Tracking this, Asian stocks also tanked on Friday led by Hang Seng index, which slipped 4 per cent.

Its raining rate hikes: The Reserve Bank of India joined global central banks in raising interest rates as it hiked the key repo rate by 40 bps, triggering an over 2 per cent fall in the equity markets on Wednesday. A Reuters report said the surprise hike came as the central bank feared  "shocker" inflation numbers for April. The move has severely dented investor confidence as borrowing costs are set to rise for producers and consumers alike, and liquidity of over Rs 80K crores will be drawn out of the banking system from the latter part of May, due to the 50 bps increase in CRR rates.

On Thursday, the Bank of England also hiked interest rates to a 13-year high of 1 per cent and warned of looming risks of a recession. The central bank also sharply raised its inflation estimates to 10 per cent for the year due to the Russia-Ukraine conflict and lockdowns in China.

Yields on the up move: With prospects of ease in inflation turning bleak and growth estimates seeing downgrades globally, investors are seen pulling out their investments from riskier assets to relatively safer bonds. This is evident from the steep rise in bond yields both overseas and back home. The yield on the 10-year treasury in the US, for instance, rose to over 3 per cent on Thursday, hitting its highest level since 2018.

Back home, the benchmark 10-year government bond yield surged around 4 per cent on Wednesday, the day the RBI shook financial markets with its surprise rate-hike, to reach its highest levels since May 2019.

Higher yields could make things worrisome for the central government as subsequent higher borrowing costs will add to its higher subsidy burden. Read here