Markets drop on US debt ceiling concerns, benchmark indices shed 6% each

Sensex and Nifty both lose over 1.2%, in two days despite positive flows from FPIs

Indian equities declined for a second day on Wednesday amid weak global cues, as concerns mounted over Chinese economic data and the ongoing uncertainty surrounding the US debt ceiling negotiations.

The Sensex ended the session at 61,560, down 372 points, or 0.6 per cent, while the Nifty closed at 18,182, dipping 105 points, or 0.6 per cent. In the past two trading sessions, the Sensex has shed 785 points, or 1.3 per cent, while the Nifty has given up 217 points, or 1.2 per cent despite positive flows from foreign portfolio investors (FPIs).

The unresolved negotiations to raise the debt ceiling have been closely monitored by investors worldwide. Investor anxiety has been rising amid concerns about whether US lawmakers will be unable to avoid a historic default before the June 1 deadline.

On Tuesday, US Treasury Secretary Janet Yellen said the government debt would leave millions of Americans without income payments and could trigger a recession.

China's economic recovery showed signs of losing momentum, with industrial output, retail sales, and fixed investment growing at a slower pace than expected in April. The concerns over the strength of the post-pandemic recovery were further exacerbated by the record-high unemployment rate for young people, indicating challenges in absorbing new entrants into the labour market.

"Markets lingered in negative territory as cautious investors continued to book profit after the recent spike. The subdued economic readings coming in from China once again raise the concern of a slowing economy and hence recession fears, which is making investors jittery about the future course," said Shrikant Chouhan, head of equity research (Retail), Kotak Securities.

Apart from weaker Chinese data and ongoing US debt ceiling concerns, worries about higher interest rates for a longer period and a looming recession are keeping investors on tenterhooks.

Brent crude rose by 0.6 per cent and was trading at $75 per barrel a day after declining 1 per cent amid concerns over demand in China and expectations of rising stockpiles in the US.

Going forward, investors will be keenly tracking inflation data from the Eurozone and Japan and statements of central bankers from the developed world for further cues.

"The performance of the key sectors like banking, financials, auto and FMCG will continue to dictate the trend. On the index front, Nifty has crucial support at the 18,050 mark, which also coincides with the short-term moving average, i.e. 20 exponential moving averages (EMA). Though the downside seems capped, we recommend maintaining a focus on stock selection and overnight risk management," said Ajit Mishra, VP-technical research, at Religare Broking.

The market breadth was mixed, with 1,785 stocks declining and 1,703 advancing. Close to four-fifths of Sensex stocks declined. Infosys shed 1.3 per cent and contributed most to the index decline. RIL, ICICI Bank and Kotak Mahindra Bank were the other big drags on the Sensex performance.