A red river of beaten stocks flowed through Dalal Street yesterday . Sensex plunged 1624 points, or 5.94% to settle at 25,741, and Nifty cracked by 490 points, or 5.92% only to find itself below the 8,000 mark and found support at 7,809. Both the indices are now at levels last seen in October 2014.
And, the investor wealth washed away by 7 lac crores (don’t start counting zeroes just yet).
Well, it were not just the Indian hearts that sank, markets all over the world tanked with the American and Chinese markets pushing them down together. The first domino to fall was USA on Friday, with Dow Jones Industrial dipping by 530 points (3.12%). The Asian markets, as soon as they kicked started the week yesterday, were trading in deep red. The following was the end result –
This is how the world markets fared on August 24 “Black Monday”
Dow Jones (US) rather fell almost 1,000 Points last night.
The fall in the US markets took place over concerns of Chinese growth and deflation. China, long considered as an economic powerhouse with average growth rate of 9.04% since 1989 till 2015, has started to struggle. The signs are present in Chinese industrial data, registering fall in manufacturing and demand for commodities.
China, on the other hand, is experiencing volatility of its own. From the burst of the stock market bubble, an impending real-estate collapse, to an economic slowdown and a Communist Government hell bent to interfere in the capital markets – things are not going well for a country harbouring dreams to make its currency internationally acceptable.
Shanghai Composite nosedived 297.8 points (8.49%) to settle at 3,209.91.
From east to west, and everything in between, the world seems truly globalised when market participants are brushed away like dust by a financial storm. From Tokyo (Nikkei), Shanghai (Shanghai Composite) in Far East to Hong Kong (Hang Seng), India (Sensex) and Indonesia (Jakarta) in Asia to Frankfurt (DAX) and Paris (CAC) in Europe and New York (Dow Jones) in America, none got away from the red flood.
Yesterday’s fall stands as the 3rd largest fall in BSE’s 140 year history
Top 10 BSE Intraday Falls (in points)
Following is the state of Indian markets in last 5 trading sessions.
Above are the constituents of Sensex.
The same Sensex which comprises top 30 Indian counters.
But this is the outcome. What made the investors panic? What is making them run to cash?
Well, though it is complex markets out there, let’s discuss some macros which are being blamed for the downfall.
The Reasons –
1) Chinese slowdown and weak global demand –
China is going through a phase, which mostly likely the world history has never seen.
This is one country where the secondary sector accounted for more than 50% of its GDP over the last decade. With infrastructure and industry as its backbone, China was touted as the next big superpower. Lo and behold, the Chinese demand for commodities has fallen by 50% and markets are experiencing a freefall.
China didn’t grow alone. Its demand for automobiles and commodities perked up industries all over the world. With a slowdown in China, the repercussions it would generate would go far and long.
2) Fall in the Rupee and Yuan devaluation –
With back to back devaluation of Yuan by China, Indian Rupee has fallen by 3.17%. Though India has been able to sustain itself much better than other Emerging Market (EM) currencies, but a weak rupee can lead to an imbalance in CAD (Current Account Deficit).
Agreed, it would make the exports cheaper but the exchange rate is slowly moving towards the 67 mark, last seen in September 2013.
The fall in rupee yesterday, led to the FM, Mr. Arun Jaitley and RBI Governor, Mr. Raghuram Rajan make statements to pacify the markets. The concerns do seem undue with India having a fat kitty of $ 380Bn as foreign reserves. However, the main worry for the corporates is the increase in cost of servicing and repayment of foreign denominated debt.
- US treasury yield breached broke within 1% territory for the first time in 5 months
- Rupee is set to touch its 2 year low, with historic low of Rs 68.85 in September 2013
- Commodities (Iron, Zinc, Copper, Aluminium, Nickel) are down 25%-50% y-o-y
- Crude Oil, on the other hand, is all set to reach 7 year lows
3) Expected Fed Interest rate hike and Crude nearing $40 a barrel –
The stock exchanges of the EMs crack just on the expected increase in interest rates by the Fed Chair Janet Yellen. This so happens because if US starts to offer a higher lending rate, foreign investors would be more inclined to park funds in “safer” US securities than in “risky” Indian stocks.
Next on the line is fall in crude to $43 a barrel with expectation to reach $40 by the end of the year. Though it is actually beneficial for the country (India being a heavy importer of oil – almost at $ 180Bn dollars in last FY), US markets are getting spooked by the decline.
These are exciting times for the Indian markets. Opportunities and risks abound. Though it may only be macro factors affecting the Indian markets right now, but with quick steps in the right direction, India stands to gain at a micro level as well.