Nifty, Sensex fall sharply in line with global cues

The stock market indices were supposed to have a weak day on Thursday since the global cues were extremely bearish overnight. On Wednesday night, the Dow Jones Index had corrected by 1,165 points and the NASDAQ had fallen by 566 points. The US market weakness on Wednesday was on two counts. Firstly, the Fed chairman had hinted at interest rates closer to 4%. Secondly, retail consumption had taken a big dent.

Of course, in the case of the US markets, the retail consumption was exemplified by Target Corporation. In its first quarter results announcement, the retailer showed pressure from weak consumption and sharp rise in prices. Oh God, is the Ben Bernanke prediction of Stagflation in the US economy coming true? These may be early days, but then markets love to react early and that is what they did. Indian markets extended that fear.

Fear it was as the NSE Nifty fell by a whopping 431 points (-2.65%) and the Sensex fell by 1,416 points (-2.61%) on Thursday. To put things in perspective, the Nifty is now a little over 15% below its peak levels. Just on Thursday alone, the market capitalization of the BSE fell by Rs6.58 trillion or a little over $80 billion of investor wealth wiped out in a single day. What chartists would fret over is that the indices closed near the lows of the day.

What was the major reason for this sudden crash. It sounds crass, but actually the situation is quite humorous. Initially, the markets crashed because the general feeling was that inflation was out of control and the central banks were doing nothing about it. Now that the central banks are taking inflation head on with rate hikes, markets are once again in panic mode because they feel the central banks are coming down too hard on rate hikes.

In a sense, there are growing concerns that rapid rate hikes may make funds too expensive and therefore result in a slowdown in the economy. That is called Recession (R-word), which is nothing but 2 consecutive quarters of negative GDP growth. Now, recession is a milder form of depression. Or to put it more cannily, when your neighbour loses his job it is recession and when you lose your own job it is depression. Sort of sums up the theme.

But back to the brass tacks of the market. There were some notable trends. ITC was the top gainer on a bad day at 3.32% while Wipro was the top loser down -6.3%. This was also reflective of the overall trend in the markets. The IT index was the big loser giving up nearly -5.74% during the day. At the same time, the FMCG index also fell, but by just about -0.65%. FMCG stocks were weak, but held up better than the other sectors.

What explains this dichotomy?

You would normally expect that a strong dollar should help IT stocks? But markets are now worried that a recession in the US could hit tech spending and squeeze margins of IT companies.

On the FMCG stocks holding up, it has always been a good defensive play in tough times. After all, whatever the economic situation, you really cannot give up your biscuits, atta and your detergents.
To add to the sentiments in the Indian market, the FPIs continued to be aggressive sellers, selling stocks worth Rs4,900 crore on Thursday.

That damage was not only visible in the index fall but also in the rupee weakening. European markets are down 1.5% to 2% on Thursday and it remains to be seen how Dow and Nasdaq react in trade. Clearly, markets on Friday will react to the US indices and also to the weekend trader caution.