Here's Why Indian Equity Markets Erased July Gains In Single Session
The Nifty hit its record high more than 45 times this year and had not seen a correction that usually follows such a rally.
The benchmark equity indices logged their worst intraday fall on Monday since June 4, erasing all of what they gained in July in a single session. Both the NSE Nifty 50 and the S&P BSE Sensex fell as much as 3.33% during the session to hit their lowest levels since June 27.
Before the fall, the Sensex had gained 8,741.69 points on a year-to-date basis, while the Nifty had risen 3,219.75 points. While the fall was primarily led by global sentiment, analysts have been expecting a correction.
Here Are The Factors That Led To Steep Fall
Yen Strengthened To Highest Since Jan 3
Japan's Nikkei continued its fall in the third consecutive session to lose 19% in its three-session fall and hit 31,156.12 points, its lowest since Oct. 31, 2023. According to Bloomberg data, the Topix also recorded its worst-ever fall.
The fall in Japanese indices comes after the unwinding of carry trade in the Japanese yen in the wake of its appreciation against the US dollar, which disrupted global markets. The Japanese yen rose 3.30% to 141.70 against the US dollar, the highest level since Jan. 3. It was trading 3% higher at 142.14 against the greenback as of 2:49 p.m.
As expected, the Bank of Japan hiked its benchmark interest rate to 0.25% from 0.0–0.1% last week. This was the second time the central bank hiked its interest rate after ending its ultra-loose policy for the first time in 17 years in March. The Japanese currency started to gain against the greenback since market participants anticipated that the BoJ would shift from its ultra-loose policy in early July.
A strengthened yen tends to dent earnings for the companies as it makes exports less competitive overseas and lowers profits earned out of the country in yen terms.
Fears Of US Recession
Fears of a recession in the US were also ignited after the country's unemployment rate rose to near a three-year high of 4.3% in July. In addition, the Institute for Supply Management's data said the manufacturing PMI dropped to 46.8 last month, the lowest since November, from 48.5 in June.
A PMI reading below 50 means contraction in the manufacturing sector, which makes up 10.3% of the country's economy.
This, coupled with a fall in the shares of tech giants, including Apple and Nvidia, dragged the Nasdaq Composite index by more than 2% and its peers Dow Jones Industrial and S&P 500 by over 1%.
The CME Fed watch tool showed that the Fed fund futures traders are now pricing in a 97.5% chance of a 50-basis-point rate cut in the US in the September meeting, as against an 88.2% chance of a 25-bps rate cut earlier.
Profit-Booking After Record Run
The Nifty has hit its record high more than 45 times this year and has not seen a correction, which usually follows such a rally.
"We've had a ferocious rally in Indian equities in the last 15 months, and everyone has been waiting for a correction for a long time, with people trying to time it with election results and budgets," Pankaj Murarka, founder of Renaissance Investment Manager, said. "We've finally got one, and the cause is global markets."
The selloff is more of a short-term volatility by way of profit-booking, according to Tanvi Kanchan, head of UAE Business & Strategy at Anand Rathi Shares & Stock Brokers.
There is no indicator of any long-term panic mode set in the Indian equities, Kanchan said. "For investors looking at entering the equity market, a staggered entry during volatile periods can be considered."
