Nifty, Sensex tank 1% amid weak global cues; here’s what is fuelling sell-off today

Nifty, Sensex tank 1% amid weak global cues; here’s what is fuelling sell-off today

Indian share market slumped on Monday as investors were spooked after the US Fed chair Jerome Powell though his Jackson Hole Symposium speech diminished the optimism that the central bank may turn around from its aggressive monetary policy amid declining commodity prices. He instead said that the era of interest rate increases is far from over. The BSE Sensex index tanked 1,467 pts to hit an intra-day low of 57,367, while the NSE Nifty 50 sank 393 points to touch the day’s low of 17,166. However, both the indices recouped some opening losses in late morning trade. Bloodbath on Dalal Street was led by the IT pack as the Nifty IT index cracked over 4%. Tech Mahindra, Infosys, HCL Tech, Wipro and TCS slipped 2% to 5%.

“Markets expected Powell to remain hawkish at Jackson Hole but the ultra-hawkish tone of the Fed chief’s message and his warnings of some economic pain were not expected and factored-in by the markets. The 17 per cent rally in the S&P 500 from mid-June to mid-August was mainly driven by an expectation that with declining inflation Fed would pivot towards lower interest rates by early 2023. This expectation has been belied by Powell’s message that rates will go up and remain there for ‘some time’. The buy on dips texture of the market is unlikely to hold. Investors should not rush in to buy the dips now and should wait for the dust to settle,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

What’s fuelling the selloff today?

Fed Chair Powell’s hawkish pivot: The US Fed chair Jerome Powell’s reaffirmation at Jackson Hole to control inflation has ignited a global selloff as he crushed the market’s hopes of easy monetary policy. Powell in his 9-minute address at the event in Wyoming made it clear that the central bank has no intention of backing off from raising rates anytime soon. “Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy,” he said. Following his speech, US markets plunged sharply. The Nasdaq shed the most by falling nearly 4%. The futures of the frontline indices were also steeply lower in after-market hours. The same was true for Asian equities as Japan’s Nikkei, Hong Kong’s Hang Seng indices tanked up to 2.9% today. Indian domestic markets mirrored the losses in global markets.

Fresh recession fears: Powell not only maintained that the US Fed will continue with interest rate hikes, but he also triggered renewed fears of an impending recession in the US. “While higher interest rates, slower growth, and softer labour market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said. Besides, spiralling gas prices in Europe are further lending strength to recession fears in major Western economies. European gas prices hit a record high above €343 per megawatt hour ($100 per million British thermal units) on Friday, hinting at the stark threat to energy-intensive industries.

Risks to foreign inflows: As interest rate hikes are likely to remain the norm in coming months as well, a sinking rupee, and Brent crude prices being persistently around $100 per barrel levels also raise concerns about the recent strength seen in foreign flows. The rupee on Monday slumped to hit an all-time low of 80.14 per dollar and crude prices rose to $102 per barrel. Analysts believe that these factors may weaken the case for consistent foreign inflows. “The sharp rise in the Dollar index above 109 and the 10-year bond yield spiking to 3.1 per cent are negative for capital flows to EMs like India. FPIs are unlikely to continue buying in India in this scenario,” said V K Vijayakumar of Geojit Financial Services.

Also Read: Bears will be back in action after Powell’s hawkish tone at Jackson Hole; 75 bps rate hike likely in next FOMC

What should investors do?

“After U.S. Federal Reserve officials highlighted the need to continue monetary tightening in the central bank’s attempts to restrain inflation, there has been a dramatic decline. Global equities have decreased as a result of the statements. To 57,627.47, the S&P BSE Sensex fell more than 2%. The NSE Nifty 50 also fell by a comparable amount, to 17,204.85 in early trade,” said Rahul Goud, Research Analyst- Equity Research, CapitalVia Research.

He added, “Global markets are being impacted by the increasing dollar index, which is currently trading at a record 109.25, the deeply inverted yield curve, as well as surging petroleum. Since we anticipate further suffering, a trader may choose to sell short Nifty futures at the present level of 17,410 with a stop loss of 17,850 and a target price of 16,800. Investors should hold off on buying till 16,800 levels,”