Indian benchmarks, Sensex and Nifty, both dropped over 1 percent on September 30 as investors continued to book in profits at record-high levels, deepening the losses from the previous session.
Sensex fell over 1000 points while Nifty fell below its crucial level of 26,000. At 12:30 PM, the Sensex had tumbled 971 points pr 1.1 percent to 84,600, while the Nifty fell 280 points to 25,898. 1,424 stocks advanced, 2,028 declined, and 122 shares remained unchanged.
The selloff wasn't limited to large caps, with mid and small-cap stocks also under pressure. The India VIX, a measure of market volatility, surged 7 percent, signalling growing unease among investors.
Experts point to five key factors driving this downfall in Sensex and Nifty.
1. Rising Tensions in the Middle East: Israel's intensified strikes on Iranian-backed forces have heightened fears of escalating conflict in the Middle East. Tensions spiked after Israel killed Hezbollah leader Sayyed Hassan Nasrallah in Beirut, triggering further attacks on Hezbollah in Lebanon and Houthi forces in Yemen. While Middle East tensions are not new to markets, the recent escalation have raised concerns amongst investors, prompting a shift away from riskier equities toward safe-haven assets like gold.
"This downturn (in Nifty and Sensex) is largely attributed to rising geopolitical tensions, particularly the intensification of Israeli strikes in Lebanon, which have introduced significant uncertainty into global markets," said Shrey Jain Founder and CEO of SAS Online.
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2. China Stimulus: According to V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, a significant factor influencing foreign portfolios is the outperformance of the Chinese stocks which is reflected in the massive surge in the Hang Seng index by around 18 percent in September.
"This surge has been triggered by hopes of revival in the Chinese economy in response to the monetary and fiscal stimulus announced by the Chinese authorities. The cheap valuations of Chinese stocks are keeping the momentum intact. This can prove to be a tactical trade which can sustain for some more time. This means FIIs may continue to sell in India and move some more money to better performing markets," Vijayakumar said.
However, Vijayakumar does not expect FII selling to impact the Indian market significantly since the massive domestic money can easily absorb whatever the FIIs are selling.
3. Profit Booking: Before the decline that began in the previous session, Nifty and Sensex witnessed a robust six-session rally that saw gains of over 3 percent due to the outsized US interest rate cut which bolstered expectations of more foreign inflows. A lack of major triggers prompted investors to cash in on recent gains.
"After a series of upticks, Nifty seems to have taken a breather," said Deepak Jasani, Head of Retail Research at HDFC Securities. "Nifty could now face resistance from the 26,250-26,475 band on the upside, while 25,849 could offer support in the near term."
Also Read | September sees largest retail sell-off since March with net sales at Rs 7,500 crore
4. Mixed Cues from Global Markets: Mainland China stocks surged 4 percent today after September's PMI came in at 49.8, beating the expected 49.5 polled by Reuters. However, this marked a fifth straight month of contraction for the manufacturing sector in China.
Separately, Japan's Nikkei 225 plunged over 5 percent as investors reacted to Shigeru Ishiba's win in the Liberal Democratic Party elections, set to make him Japan's next prime minister.
Meanwhile, the Dow Jones Industrial Average closed at a record high on September 27, as a subdued inflation report raised hopes for more Fed rate cuts. The Nasdaq dipped slightly, and the S&P 500 edged lower but remained near record levels.
5. Nervousness Ahead of US data, Powell's Speech: Investors are cautious ahead of several crucial events this week, starting with Federal Reserve Chair Jerome Powell's speech today. Key data releases, including job openings, private hiring figures, and ISM manufacturing data, are also expected. The week will conclude with the US nonfarm payroll report and US unemployment rate report, which could impact future rate decisions.
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