Moneycontrol Pro Panorama | Sell-off surge

Indian markets have exhibited structural weakness over the past two weeks.

Dear Reader,

The much-needed correction in the equity market has arrived, with Indian markets down nearly two percent as of 1 pm today. Banking stocks, particularly those in the private sector, are the worst affected. This downturn can be largely attributed to HDFC Bank's disappointing results announced on Tuesday.
The Indian markets seem to be following a trend observed in the US market, which fell by nearly 0.6 percent after Morgan Stanley reported poor financial figures, and Apple declared an unusual discount in the Chinese market due to competitive pressures.

While today's decline has various contributing factors, Indian markets have exhibited structural weakness over the past two weeks. This concern was highlighted in our weekly market outlook columns here and here.

Several technical indicators displayed a negative divergence, where the market reached new highs while internal factors weakened. Only a handful of stocks were aligning with the market's direction. Foreign Institutional Investors (FIIs) maintained significantly high positions in the derivative market without booking profits, signalling an imminent market fall when they decide to sell.

The build-up to the current decline has been unfolding over the past few weeks, and there are multiple reasons behind the market's structural weakness. With a general election scheduled for May, traders have begun withdrawing funds in anticipation of a rally that has been ongoing since mid-October 2023.

Internationally, various developments suggest challenging times ahead. The recent incident in the Red Sea involving Iran-backed Houthi rebels from Yemen firing at sea vessels has raised tensions. Despite the presence of US and UK naval forces, the rebels persist. Iran, seeking attention, has initiated attacks in Syria, Iraq, and Pakistan, drawing global focus to Israel's ongoing offensive in Gaza.

As the conflict intensifies, neighbouring countries supporting Palestine may feel compelled to act, attacking random targets to demonstrate solidarity with the Palestinians. The Middle East is rapidly becoming a potential war zone, creating apprehension in the market. Any excuse, including poor financial performance, is being used as a reason to exit.
With logistical costs expected to rise due to the Red Sea attacks and energy prices increasing, there is a possibility that anticipated interest rate reductions by various central banks may be postponed. Given these circumstances, it is logical for traders to lighten their positions in equity markets. The surprising element is that most of them decided to do it on the same day.

Investing insights from our research team

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(These are published every trading day before markets open and can be read on the app).

Shishir Asthana
Moneycontrol Pro