Indian stock markets seem to be ensnared by a bear trap as the benchmark indices slumped to fresh 52-week lows on June 16, stretching their losing streak to a fifth consecutive session. The BSE Sensex plunged 1,046 points, or 2 percent, to 51,496, while the Nifty50 tanked 332 points or 2.11 percent to 15,360.60.
The broader markets fell in line with the benchmarks. Nifty Midcap 100 and Smallcap 100 slumped more than 2 percent and 3 percent, respectively.
Market breadth was largely in favour of the bears; about eight shares declined for every rising share on the NSE.
Here are the factors that pulled the markets down to new 52-week lows
Fed Rate Hike
The US Federal Reserve finally delivered a rate hike at upper end of the expected range and pushed the global markets down. The central bank raised the funds rate by 75 basis points (bps), the biggest increase since 1994, to tame inflation that accelerated to a 40-year high of 8.6 percent in May. The Fed hinted at more rate hikes if inflation remains high.
One basis point is one-hundredth of a percentage point.
With this, the Federal Open Market Committee (FOMC) has taken the benchmark funds rate to the 1.50-1.75 percent range.
"Clearly, today's 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common," Fed Chair Jerome Powell said. "We want to see progress. Inflation can't go down until it flattens out. If we don’t see progress ... that could cause us to react. Soon enough, we will be seeing some progress.”
Morgan Stanley sees a steeper path and higher peak rate ending this year at 3.625 percent, compared with the FOMC’s median projection of 3.4 percent.
"The Fed is strongly committed to reducing inflation and the June data won't look much better at the core level, which leads us to expect the Fed to follow with another 75 bps hike at its July meeting," Morgan Stanley said in its US Economics & Global Macro Strategy report.
Bank of England May Hike Rates
The Bank of England is likely to follow the Fed’s example and hike interest rates in Thursday's policy meeting to control inflation. The hike, if it takes place, would be the fifth rate increase in a row and would be at the cost of growth and a weakening currency.
The UK central bank raised interest rate by 25 bps in its May meeting, taking it to 1 percent. In April, UK’s inflation climbed to a 40-year high of 9 percent and the bank expects it to rise above 10 percent in the second half of this calendar year. The economy shrank by 0.3 percent in April against a 0.1 percent contraction in March.
Global Markets Correct
Global markets corrected sharply after the rate hike by the Federal Reserve and ahead of the expected rate increase by the Bank of England. The markets may be pricing in a slowdown in growth in developed economies given the faster increase in rate hikes, experts said.
"Elevated oil and commodity prices along with supply disruptions make a recession possible in developed economies which may have an impact in India," said Rajiv Shastri, Director and CEO of NJ Asset Management Company.
He added that the US economy was extremely susceptible to a recession at this point. "With this rate hike and another one indicated in the near future, growth will certainly be hit. Whether it dips into negative territory or not is still open to many influences, but there is a high probability that it will."
Germany's DAX, Britain's FTSE, and France's CAC fell 2-3 percent at the time of writing this article.
Asian markets closed mixed with Hong Kong's Hang Seng falling more than 2 percent, followed by China's Shanghai Composite (down 0.6 percent) and Australia's ASX 200 (down 0.15 percent). Japan's Nikkei gained 0.4 percent.
Oil Price
Oil prices remain high given tight supply after the Fed’s rate increase raised fears of a recession in the United States. International benchmark Brent crude futures traded at $119 a barrel at the time of writing this article, up 0.3 percent, while US crude oil prices rose by 0.4 percent to $115.8 a barrel.
Elevated oil prices due to the ongoing Ukraine-Russia war remain a big concern for equity markets and experts say they will remain so at least until the end of this calendar year.
FII Selling
Foreign Institutional Investors (FIIs) have remained net sellers for the ninth consecutive month given the weak global sentiment. They have net sold more than Rs 31,000 crore worth of shares so far in June on top of more than Rs 2.2 lakh crore of selling in the previous five straight months.
Domestic Institutional Investors have managed to support the market by buying Rs 2.06 lakh crore of shares so far this year.
Stocks Under Pressure
Every sector participated in the correction with Nifty Metal being the prominent loser, falling more than 4 percent on fears of slowing growth in developed countries after consistent rate hikes by central banks to control inflation.
Nifty Bank, Auto, Financial Services, IT, Pharma, Consumer Durables and Oil & Gas indices were down around 2 percent each.
Technical View
The Nifty50, after breaking a 52-week low, extended its correction in the afternoon and touched fresh one-year low of 15,369.80 on Thursday, forming a large bearish candle on the daily charts, indicating more nervousness on Dalal Street.
"Now as long as it is below the 15,500 zone, we can expect lower levels of 15,350 and 15,000," said Chandan Taparia, Vice President of Equity Derivatives and Technical, Broking & Distribution at Motilal Oswal Financial Services.
He expects the Nifty to trade with a negative bias. "One can utilise any bounce as a selling opportunity till it holds below the 15,735 zone. At the current juncture, we are advising to be with selective stocks."
India VIX
The volatility index (VIX) climbed above the 28 levels intraday before recovering to close at the 22.87 levels, down 3.25 percent from the previous close.
This clearly indicates that volatile swings can continue and the trend is expected to remain in favour of the bears as long as India VIX, known as the fear gauge, holds above the crucial 20 mark.
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