Sensex crashes 1,600 points in 3 days; Rs 5.4 lakh crore loss. 7 factors behind the selloff

NEW DELHI: Headline equity index Sensex, which was on its longest winning streak since 2007 by rallying non-stop for 11 days last week, has now lost over 1,600 points in a span of just 3 days with Dalal Street investors being poorer by about Rs 5.4 lakh crore.

Sensex lost 242 points on Monday, 796 points on Wednesday and over 570 points on Thursday, taking the total loss to 1,608 points this week. The market was shut on Tuesday to mark Ganesh Chaturthi festival.

In the meantime, the market capitalisation of all companies listed on BSE has also fallen to Rs 318 lakh crore, taking the total investor wealth erosion to Rs 5.4 lakh crore.

Last night, the US Federal Reserve didn't opt for an interest rate hike but projected one more 25-basis-point rate hike this year and 50 bps of rate cuts in 2024, versus 100 bps of 2024 cuts in June projections.

The markets are likely to remain under pressure till they adjust and digest the fact that interest rates are actually not going down in a hurry.

"We believe that high-interest rates are not good for the markets. Both the yields and markets cannot stay at an elevated level for too long. Either one will break down. Given that Fed is resolute in its stand it could be the markets which break down first," said Apurva Sheth of SAMCO Securities.

Here are top 7 factors keeping bulls under check:

1) Fed fear
Fed's signal to markets that higher interest rates are the new normal may have bearish implications. "US Fed's decision to defer rate hike, although expected, may keep global markets on tenterhooks. Inflation in the US is still high and other economic parameters are still showing little signs of slowing down. US 10-year at 4.472% and 2-year at 5.184% does reflect the expectation that before year-end further rate hikes may be expected," said Naresh Tejwani of Abans Group.

2) Bond yields
The yield on two-year US Treasury notes rose to a 17-year high of 5.1970%, while the 10-year yield jumped to 4.4310%, a new 16-year peak. Rising bond yields are negative for equity prices. Nasdaq ended 1.5% lower and other Asian markets like those of Japan and China also ended over 1% lower.

3) Dollar index
The dollar index, which measures the American currency against a basket of rivals, rose as high as 105.59 on Thursday, its strongest since March 9.

4) Crude reality
Adding to the inflationary noise is rising crude oil prices. Analysts are projecting that oil rates could touch $100 a barrel mark soon. A stronger dollar typically makes commodities such as oil more expensive for buyers using other currencies.

Rising US bond yields, stronger USD and elevated energy prices – all are ingredients for a bad recipe for Asian stocks, Nomura analysts say.

5) Valuations
With Nifty near lifetime highs, the index valuations are not in the cheap zone anymore even if one doesn't consider it to be expensive. The room for correction is more pronounced in case of midcap and smallcap stocks where valuations have gone for a toss in many pockets.

6) FII selloff
After splurging money on Indian stocks for six consecutive months, FIIs have been on a selling spree in September. NSDL data shows that FIIs have been net sellers to the tune of Rs 5,213 crore so far in the month.

7) Technical factors
Nifty had on Thursday formed a long bear candle with upper shadow on the daily chart and indicated the formation of a short-term top reversal pattern in the index at the swing high of 2022 levels.

"Going forward, we expect the Nifty to undergo a healthy retracement of three-week rally (19200-20200) wherein key support is placed at 19600. The current decline is expected to result in higher bottom formation around 19600 followed by short-term consolidation which should not be construed as negative but will act as a base for next leg of rally within the structural up trend," ICICI Securities said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)