NEW DELHI: A 1,274-point fall in the Sensex was investors' worst nightmare coming true.
Though the market appeared to have calmed some bit and the benchmark indices moved up from their lows, it still turned out to be a 'terrifying' Tuesday for Dalal Street. The morning crash knocked off Rs 5.4 lakh crore investor wealth within seconds.
Sensex cracked over 1,274 points to hit a low of 33,482, before making a smart rebound. The index was trading 426.24 points, or 1.23 per cent, lower at 34,330.92 at 2.51 pm . Twenty six nine of 30 Sensex stocks were trading in the red. The Nifty50 was down 127.10 points, or 1.19 per cent, at 10,539.45. The index hit the sub-10,300 level in morning trade.
But what led to this selloff?
US selloff & momentum traders
Momentum strategies could be at play, suggest analysts.
"Indian markets are mirroring the freefall in US equities. The start of quantitative tightening by the US Fed, fear of inflation firming up and hardening bond yields led to an increase in US VIX and sent the US market spiralling down in the last half hour of trade with the futures down sharply post market hours. Momentum strategies added to the domino effect," said Ritesh Jain, chief investment officer at BNP Paribas Mutual Fund.
The plunge in US stocks on Monday that came just after 3 pm went beyond a normal reaction to economic circumstances and had elements of a liquidity-driven selloff. "The crash had elements of a liquidity-driven selloff," Dennis Debusschere, head of portfolio strategy at Evercore ISI, told Bloomberg.
Goldman Sachs said managed futures funds (CTAs) are likely to apply additional downward pressure on markets if forced-model selling occurs. Additional pressure from CTAs may further exacerbate the sell-off from risk parity funds, it said.
CTAs are long/short strategy funds aimed at capturing trends in the market in either direction, while risk parity is a long-only strategy with negatively correlated assets that is sensitive to volatility spikes in the market.
"We estimate this community to be long approximately $70 billion of US equities and $190 billion globally coming into today. If negative price action continued or worsened, we think getting flat (i.e. $190 billion of global sales) in a month is reasonable," Goldman Sachs said in a note.
Jain of BNP said the market had turned completely from greed to fear and that the fear should settle down hopefully in next few days once leveraged positions are wound down.
"It's a wait and watch situation until then," he said.
Powell sworn in as Fed Chair, policy uncertainty
The crash in the market has come as Jerome Powell was sworn in as new chairman of the US Federal Reserve. Data showed non-farm payrolls in US climbed 200,000 in January, as the unemployment rate dropped to 4.1 per cent. The Bureau of Labor Statistics suggested that wages growth saw the biggest monthly gains since the end of the Great Recession.
Average weekly pay rose in 30 states, also up sharply from prior years. Besides, US services sector activity jumped to a 12-year high in January, led by robust new orders. The ISM non-manufacturing activity index jumped 3.9 points to 59.9, the highest reading since August 2005.
Jim O'Neill, Former Commerce Secretary in the UK government told ET Now that the US is growing and the central bank may need to tighten monetary policy faster than the market has perceived.
In its recent policy review, the last for Janet Yellen, the Fed had noted that inflation on a 12-month basis is expected to move up this year and will stabilise around the Fed's 2 per cent target over the medium term.
Rising US bond yields
Bonds globally are on a rise. Sovereign bonds are seen as risk-free assets. If the cost of risk-free money goes up, it raises opportunity cost of investments in equity. Take the Indian context. India's 10-year bond yield hit 7. 6 per cent per annum from 6.3 per cent it quoted at the end of July 2017.
"What has been alarming in the Indian context is the runup in the 10-year bond yield that has been almost a rocket propelled run up from August. Both globally and in India, we will look for bond yields to stabilise. This sort of rapid run up in bond yields is worrying because if the cost of risk free money goes up so sharply, then obviously you start worrying about money which involves taking risk, which is equity investing," Saurabh Mukherjea of Ambit Capital told ETNow.
RBI Policy meet
The monetary policy committee (MPC) of Reserve Bank of India (RBI) is going into a two-day huddle from Tuesday, with a decision due on Wednesday. This will be the sixth bimonthly monetary policy meet of FY18. Speculations and reports suggest the central bank may tighten its stance, given the fiscal deficit target which has been revised upwards to 3.5 per cent against 3.2 per cent projected earlier. Retail inflation rose to a 17-month high of 5.21 per cent in December.
LTCG, fiscal slippage depression lingers
In the Indian context, the re-introduction of long-term capital gains tax on equities had already depressed the mood on Dalal Street. Also, there were concerns over fiscal slippage. A day after the Union Budget, the domestic market witnesses a mayhem on Friday in a knee-jerk reaction amid wild speculation over the impact of LTCG, possible tax treaty shopping by FPIs and confusion over grandfathering of the equity gains till January 31, 2018.
! source