Nifty extends losing streak to longest in 12 months. What’s driving the sell-off?

The benchmark Nifty50 and BSE Sensex indices extended their losing streak to the sixth session on January 25, the longest such losing streak since January last year.

The indices have fallen more than 8 percent in the six sessions as risk aversion gripped investors amid signs of global central banks withdrawing their pandemic-era support for the financial markets.

While the market managed to stage a brief recovery after opening with deep losses, the recovery failed to sustain as US stock futures indicated a more than 400-point cut on the Dow Jones Industrial Average later in the day.

Let’s take a look at the factors that are driving investors’ apprehension for risky assets like equities:

1. US Fed’s inflation fight

After denying that runaway inflation in the US economy was “transitory” throughout 2021, the US Federal Reserve made an about turn in the dying months of last year to turn its focus on fighting inflation. The pivot has sparked concerns that the central bank will end up raising interest rates too fast and trigger a short-term recession in the US.

“The market is discounting a hawkish Fed and if the Fed sounds very hawkish and indicates four rate hikes in 2022 the market will again turn weak,” said V K Vijayakumar, chief investment strategist at Geojit Financial Services. All eyes then are on the outcome of the central bank’s monetary policy meeting on Wednesday.

2. Incessant selling from FPIs

The knock-on impact of the US Federal Reserve moving towards higher interest rates is the withdrawal of money by foreign portfolio investors. Ever since the Fed hinted at tapering its $120-billion per month bond buying program in October, foreign investors have been net sellers of Indian equities.

The selling pressure has intensified in recent sessions after pausing in early January with FPIs net selling Indian equities worth over Rs. 3,000 crore on Monday alone. So far in January, FPIs have net sold Indian stocks worth nearly Rs. 12,000 crore.

3. Geopolitical tensions in the West

The ongoing geopolitical skirmish in Eastern Europe between Russia and Ukraine has got the diplomatic community on the edge. Russia has been building up military presence on its border to Ukraine that has sparked fears of an impending invasion.

On Monday, the US stated that it has ordered 8,500 troops to be on alert for possible deputation in Eastern Europe if the North Atlantic Treaty Organization triggers an emergency response to any escalation in tensions.

4. Crude oil prices soaring

Global crude oil prices have been soaring after their mini-crash in late 2021 on optimism for strong global demand in 2022 and rising geopolitical tensions in eastern Europe and West Asia.

The drone attack at an oil refinery in the United Arab Emirates has also raised concerns over the safety of supplies from the world’s biggest oil exporting region. The Brent futures of crude oil have risen 26 percent in the past three months and are sitting close to their seven-year highs. High crude oil prices is a major risk for the Indian economy as it could further fuel inflationary pressures.

5. Muted buying from DIIs

While selling from foreign investors has been intense, domestic institutional investors have failed to match them. Domestic institutional investors have net bought stocks worth Rs. 7,505 crore so far this month that pales in comparison to the selling from foreign investors.

With flows from domestic institutional investors muted, the selling pressure from foreign investors has magnified the fall in the stock market, analysts said.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.