Three reasons why Sensex plunged over 600 points on Thursday

Indian markets mirrored global sell-off after the US Federal Reserve's minutes indicate sooner and faster-than-expected rate hikes

Equity markets came under heavy selling pressure on Thursday amid feeble global cues. In the intra-day trade, the BSE Sensex tanked 927 points, while the Nifty50 slipped below the 17,700-mark.

The markets had started the calendar year 2022 on an upbeat note, with the key benchmark indices registering strong gains in each trading session so far. The BSE Sensex reclaimed its 60,000-mark for the first time since November 17, 2021 on Wednesday, while the NSE Nifty rallied nearly 8 per cent (1,311 points) in the last 12 straight trading sessions to 17,925.

Other than profit-taking given the sharp rally, the selling can be attributed to the following three key reasons:

1. US FED FOMC minutes

Minutes from the US Federal Reserve's December policy underpinned the officials hawkish tone. The minutes not only indicated that inflation could lead to sooner and faster than expected rate hikes, but also shrink in the balance sheet post rate hikes.



“Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated,” according to minutes published on Wednesday.

“Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate,” the minutes added.

 
Following which, the US markets tanked sharply in trades on Wednesday. The Dow, S&P 500 and Nasdaq slipped 1 per cent, 2 per cent and 3 per cent, respectively. Asian counterparts were also seen following suit on Thursday, with Japan's Nikkei down as much as 2.6 per cent. Kospi and Taiwan were also down around a per cent each, while Hang Seng and Shanghai held marginal losses.

“The market has been facing downward pressure after touching its all-time high in October. While the economy has been recovering on expected lines, the global cues indicating unwinding of balance sheet expansion by central banks around the world have been a major factor. In this context, the US Fed’s hawkish stance has not been a surprise, but the negative market reaction today is primarily due to the indication of balance sheet reduction in the Fed minutes released yesterday. Almost all members showed concern on rising inflation and possibility of accelerating rate hikes followed by a reduction in the balance sheet. Although the timing remains uncertain, market participants are now expecting this to happen sooner than later. In addition, the rising cases of COVID-19 around the globe has also increased the risk levels. Overall, we remain cautious in the markets right now.” said Mohit Ralhan, Managing Partner & Chief Investment Officer of TIW Private Equity.

2. Rapid rise of Covid-19 cases, Omicron threat

India reported fresh 90,928 cases Covid-19 cases in the last 24 hours, thus reporting a sharp spike of over 56 per cent in daily infections. As per the government data, the Omicron tally stood around 2,630.

The contagious spread has led to fresh travel curbs and restrictions at state, and international levels. While select cities like Mumbai, New Delhi have announced curfew plans, others have also adopted 50 per cent occupancy rates in hotels and other entertainment parks to limit over-crowding. On Wednesday, Hong Kong banned inbound flights from India.

3. Technical battle

Technically, the Nifty has been in a downtrend since late November after its 20-DMA (Daily Moving Average) slipped below the 50-DMA on November 25, 2021. However, the recent rally has helped the NSE benchmark to close above its 50-DMA for three straight trading sessions, thus raising hopes of a likely trend reversal.

For the trend reversal to materialise, not only the Nifty needs to sustain above 17,500-odd levels, but the 20-DMA (now around 17,260) also needs to cross the 50-DMA placed at 17,485 odd levels. The tug of war between the bulls and the bears may get intense as they fight to take the upper hand.