Mayhem on Dalal Street: Five reasons why Sensex tanked by 699 points

There was mayhem on Dalal Street on Friday as BSE Sensex plunged by 699 points to dip below the 27,000-level on massive sell-off and persistent foreign fund outflows amid weak global cues. This was the weakest closing since June 29, 2016. The 50-share NSE Nifty broke 8,300-mark after plunging 229.45 points, or 2.69 per cent, to 8,296.30, its lowest closing since June 30. After Donald Trump’s unexpected victory over market-favourite rival Hillary Clinton investors are now banking on business-friendly policies and measures to boost the US economy, a key driver of world growth. Emerging markets bore the brunt of selling, with MSCI emerging market index falling 1.5 percent to its lowest level since July, with Indonesia and Malaysia hit the hardest in Asia.

We take a look at the major reasons that led to the fall in markets today:

Higher US interest rates: Stocks fell on fears that incoming US President Donald Trump’s policies would be inflationary, leading to higher US interest rates and denting the appeal of emerging markets. US bond yields have surged after Trump’s election on worries his policies stance – from protectionism and fiscal expansion – will boost inflation and lead the Federal Reserve to raise interest rates more than expected. “The market’s focus has shifted to Trump’s policy after the initial knee-jerk risk-off reaction. The markets think he is likely to protect the U.S. domestic economy, especially the old economy,” said Koichi Yoshikawa, executive director of financial markets at Standard Chartered Bank. “That explains why the Dow was up and the Nasdaq was weak,” he added. U.S. bond markets have also seen dramatic moves since Trump’s victory, with the 10-year U.S. Treasury yield hitting their highest levels in 10 months. “You have fiscal policy that will widen the deficit by trillions of dollars in a decade, and if there’s a 20 percent tariff on imports from China, that alone would boost inflation by one percentage point,” said Tomoaki Shishido, fixed income analyst at Nomura Securities.

FII outflow: If the US Federal Reserve hikes rates in December it could make emerging markets less attractive for global investors, sparking outflows and hitting currencies such as the rupee. Foreign portfolio investors (FPIs) sold shares worth Rs 733.49 crore yesterday, as per provisional data. Offloading of positions by cautious participants ahead of September IIP data, to be released later in the day, also added to weakened sentiment

Weak Rupee: Soaring US yields have been a boon to dollar bulls. The euro dipped to $1.0908, compared to $1.1025 before the U.S. elections. The dollar strengthened sharply against the yen, which has traditionally a strong inverse correlation with U.S. yields because higher U.S. yields encourage Japanese investors to buy more U.S. debt. The partially convertible rupee was at 67.0400 per dollar versus its previous close of 66.6250. It fell as low as 67.2000, its lowest since Aug. 29, earlier in the day. “The larger cause of worry is with the currency. In global markets, some of the currencies are getting hit very badly against the dollar, resulting in significant amount of economic damage to those countries,” said Deven Choksey, managing director at KR Choksey Securities.

Weak Earnings: Weak earnings from country’s largest lender SBI and other bluechip companies also affected the market sentiment. Shares of country’s largest lender SBI today dipped 3 per cent after the bank saw a massive 99.6 per cent plunge in its September quarter consolidated profit at Rs 20.7 crore, hit by 3-fold rise in bad loan provisioning. Stock fell 3.09 per cent to settle at Rs 272.90 on BSE. Shares of drug firm Wockhardt tumbled over 5 per cent after the company reported 81.59 per cent dip in consolidated net profit to Rs 17 crore for the September quarter of the current fiscal.

Bank stocks: The Nifty bank index dropped as much as 1.41 percent, after a four-session winning streak on the back of hopes that India’s unexpected push to withdraw larger banknotes from circulation would lead to a surge in lenders’ cash positions. ICICI Bank Ltd and Yes Bank Ltd were among the biggest percentage losers on the index. The Nifty IT index fell 2.51 percent, heading for its biggest weekly fall since mid-February, on worries about what Trump’s election would mean for the export-dependent sector.

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