Sensex, Nifty take a knock: 7 factors that are weighing on the market

The market started the May month series and week with a sharp fall led by correction across sectors, except pharma that gained more than 1 percent.

The benchmark indices saw the biggest single-day fall since March 2020 as the Nifty50 plunged 566.40 points or 5.74 percent to close at 9,293.50 and the BSE Sensex fell 2,002.27 points or 5.94 percent to 31,715.35. Indices had rallied nearly 8 percent last week.

Investors lost more than Rs 5.8 lakh crore of wealth in today's trade.

The fall in broader markets was less compared to benchmarks as the Nifty Midcap index was down 4.4 percent and Smallcap declined 3.2 percent.

"After a continuous rally last week market benchmark opened it's first session on a weak note tracking weak Asian peers, rising tension among US-China, sluggish earnings for big cos, implementation of lockdown 3 and India's April record low manufacturing PMI data, trading down by around 5 percent," Sundar Sanmukhani, Head of Fundamental Research Desk at Choice Broking said.

On the sectoral front, Nifty Bank, Auto, Financial Service and Metal were biggest losers, falling 7-8 percent.

Here are seven factors that could be pulling the market lower:

US-China Trade Tensions resurface

After US President Donald Trump threatened fresh tariffs on the import of Chinese products over China's mishandling of the pandemic, there are rising chances of a fresh trade war between US and China worried investors globally.

US President Donald Trump said Sunday that he believed that a “mistake” in China was the cause of the spreading coronavirus pandemic, though he did not present any evidence for the claim. CNBC reported.

US has recorded the highest number of COVID-19 infections (over 11.5 lakh) and deaths (over 68,000). The outbreak was first reported in China in late 2019 where there were more than 84,000 confirmed cases and over 4,600 deaths.

"United States has been believed that China has initiated this virus mess. It is not only the US, but most other countries also have same thought. So we will have global impact if the actual trade war starts again," Ajay Jaiswal, President, Strategies & Head of Research at Stewart & Mackertich told Moneycontrol.

Global Fall

The rising US-China tensions after the coronavirus outbreak dampened sentiment across global markets. Among Asian stocks, Hong Kong's Hang Seng fell 4.2 percent while South Korea's Kospi and Japan's Nikkei slipped nearly 3 percent following 2.5-3 percent fall seen in US markets overnight. European markets were trading lower by more than 3 percent at 16:06 hours IST.

Zero Auto Sales and Lockdown Extended

For the first time, auto companies reported zero sales in a month of April after the lockdown extended from April 15 to May 3, against earlier March 25-April 14 to limit the spread of novel coronavirus.

Now the government again extended lockdown by two weeks, from May 3 to May 17, though there is a relief in case of opening of shops for essential as well as other services in green and orange zones. Even some industries also resumed operations last month but transport will remain shut.

Hence there could be pressure on earnings and economy in first half of FY21, but also there could be further delay in recovery though the government announces fiscal stimulus, experts feel.

HUL, Tech Mahindra Earnings

Weak earnings by Hindustan Unilever and Tech Mahindra also added fuel to the fire. HUL reported contraction of 7 percent in its volume growth and earnings missed analysts expectations on all fronts.

"We expect the twin overhang of possible collateral damage from a sharp slowdown in overall economy, and GSK Plc’s upcoming $3.5 billion stock-offering to keep the stock price under check for the time being," JM Financial said.

Tech Mahindra's Q4FY20 result was also a major disappointment. Both revenue and margin posted a sharp decline of 4.3 /19.4 percent QoQ due to COVID-19 uncertainty. Telecom registered a de-growth of 8.3 percent QoQ post a strong uptick in Q3 due to weak Comviva and lower BPO revenue (COVID-19) while weakness in manufacturing , retail and TME dragged enterprise growth.

"Going forward, we expect Tech Mahindra to underperform among Tier 1 considering delay in 5G roll out (Telecom) and reduction in discretionary spend (enterprise) to impact the growth in FY21," said Narnolia.

Manufacturing Output Plummets

The sharp fall in manufacturing activity also dampened the sentiment today.

"April data pointed to an unprecedented contraction in Indian manufacturing output. The result came amid national lockdown restrictions to help stem the spread of the coronavirus disease 2019 (COVID-19), which in turn led to widespread business closures. In an environment of severely reduced demand, new business collapsed at a record pace and firms sharply reduced their staff numbers. Meanwhile, both input costs and output prices were lowered markedly as suppliers and manufacturers themselves offered discounts in an attempt to secure orders," IHS Markit said.

"At 27.4 in April, the seasonally adjusted IHS Markit India Manufacturing PMI fell from 51.8 in March. The latest reading pointed to the sharpest deterioration in business conditions across the sector since data collection began over 15 years ago," it added

Volatility Increases

After US-China trade tensions, the volatility increased sharply to 43.66 intraday, from 34 levels seen last week.

The sharp increase in volatility also put selling pressure on the market. India VIX was up more than 28 percent to over 43 levels.

Technical View

The Nifty50 has broken the crucial support of 9,300 levels, which was on expected lines given the rally seen last week and Friday's fall in SGX Nifty on weak global cues.

Experts expect further selling pressure in the market as the index has broken crucial support of 9,300 levels.

"Technically speaking index should remain under pressure unless they close above 9,732 levels. In such a scenario all pull back attempts towards 9,500 levels shall be considered as an opportunity to create fresh short positions," Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, Chartviewindia.in told Moneycontrol.