Sensex plunges as D-Street joins global rout: Key factors behind the crash

NEW DELHI: A passing comment by one of the Federal Reserve officials overturned all expectations of traders across the world and applied brakes on the raging bull run. Now they are forced to incorporate sooner-than-expected interest rate hikes in their strategies.

St Louis Federal Reserve President James Bullard said that the rate rise could come as soon as late 2022, and that it made sense for officials to become "a little more hawkish" as inflation surges.

Though not all officials think on similar lines. Minneapolis Federal Reserve President Neel Kashkari said on Friday that he wants to keep the benchmark short-term interest rate near zero at least through the end of 2023, which is what the market has been expecting. But the bears needed just any reason to sell.

"The Fed's latest statement, though only mildly hawkish, appears to be impacting global stock markets more seriously than thought earlier. Market volatility has spiked and more volatility is in the offing. When valuations are high, corrections can be sharp,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Indian benchmark indices joined their global counterparts and plunged sharply in the opening trade on Monday, especially dragged by banking and auto sector stocks. Though there was some recovery later, the damage was done. The fall eroded over Rs 3 lakh crore of equity wealth within minutes.

After opening in the red, benchmark indices pared some losses. At 10:20 am, BSE flagship Sensex was down 245 points or 0.47 per cent at 52,098. NSE benchmark Nifty fell 75 points or 0.48 per cent to 15,608, in line with global indices.

The comment from the Fed official sparked hefty losses on Wall Street, with the Dow Jones and S&P 500 dropping more than one per cent and the Nasdaq almost one per cent. Selling continued in Asia, with Tokyo leading the way with a more than three per cent fall, while Sydney shed more than two per cent. Hong Kong, Seoul, Taipei and Jakarta all lost more than one per cent, with Singapore, Wellington and Manila also in the red. Shanghai was flat.

Long-term money managers in India have already started incorporating the finicky Fed in their strategy. Market veteran and the CIO at ICICI Prudential AMC S Naren said US Fed rate hikes are the biggest risk for the domestic market in the next two years.

Meanwhile, the greenback that trades near multi-month peaks against other major currencies is a clear emerging market negative, according to analysts. A rise in the dollar makes emerging markets like India unattractive for foreign investors and thus leads to fund outflow across the borders.

“A lot will depend on what FIIs will do in the coming days. Also, retail investment activity has to be watched. If there is a sharp correction in the market, the mid-small caps are likely to be impacted more. There is safety in strong performing large-caps. This is the time for safety and caution," said Vijayakumar.

Market valuations at a historic high have also induced more caution in the minds of investors. There are doubts in certain sections on Dalal Street that maybe the market has surged too much and the economic recovery (and thus earnings) may not keep up with the expectations.

Commodities stocks have provided some support to the market in recent weeks and Monday was no different. Buying in heavyweight Reliance Industries against market trends has also given vital support to the Nifty and Sensex in recent days.

In the 50-share pack Nifty, NTPC was the biggest gainer, up 2.38 per cent. Adani Ports, HUL, HDFC Life Insurance, ONGC, Asian Paints, Britannia Industries and Sun Pharma were among other gainers.

Hindalco was the top loser in the pack, down 2.38 per cent. Tata Motors, UPL, ICICI Bank, M&M, JSW Steel, SBI, IndusInd Bank, UltraTech Cement and L&T were other losers in the pack.

Broader market indices also plunged in early trade but recovered sharply thanks to low-level buying. As of writing this piece, they were mixed with smallcaps in the green and midcaps in the red.

In the short term, F&O expiry is another factor that is on the minds of investors. India VIX, the measure of volatility and fear on the Street, spiked nearly 8 per cent to near 16-level as traders tweaked their strategies.