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    Rs 3.5 lakh crore m-cap wiped off! Was just the Fitch factor behind carnage on D-Street?

    Synopsis

    Fitch's latest move has revived memories of how stocks around the world had crashed in 2011 when S&P downgraded US credit rating by one notch to AA+ with a negative outlook, citing concerns about budget deficits.

    bear market istock 1 (4)iStock
    After Fitch Ratings stripped the US of its top-tier sovereign credit grade from AAA to AA+, loud echoes were heard on Dalal Street too with Sensex falling over 1,000 points intra-day to slip below the 66,000 mark. Investors were left poorer by Rs 3.48 lakh crore as the market capitalisation of all BSE-listed stocks fell to Rs 306.8 lakh crore with the Sensex ending 676 points lower and Nifty managing to end above its support at 19,500-mark.

    Fitch's latest move has revived memories of how stocks around the world had crashed in 2011 when S&P downgraded US credit rating by one notch to AA+ with a negative outlook, citing concerns about budget deficits.

    Given India's strong domestic story and in-line Q1 earnings season, bulls say Fitch's move won't have much effect on Indian markets.

    "It is important to note that the downgrade doesn’t say anything that the market doesn’t know. So, the negative knee jerk reaction will be short lived. Globally equity markets have been rising on the US economy’s soft landing narrative. The downgrade doesn’t alter that," said Dr. V K Vijayakumar of Geojit Financial Services.

    While downgrading the world's most powerful economy, Fitch said tax cuts and new spending initiatives coupled with multiple economic shocks have swelled budget deficits.

    “The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades,” Fitch said in a statement.

    The fallout is having a ripple effect on world markets. On Dalal Street, all sectoral indices were trading in the red with auto, banks and metal stocks being among the worst hit. Tata Steel, Tata Motors, Hero Moto, Eicher Motors and Coal India were trading lost up to 3.5% while index heavyweights RIL and HDFC Bank lost over 1% each. Fear was palpable on Dalal Street as volatility indicator India VIX ended 10% higher.

    Other than the Fitch factor, here are 6 other reasons making Nifty bulls weaker:

    1) Global markets
    Indian markets are following weak overnight cues from Wall Street with Nasdaq ending 0.43% lower and Dow Jones' 0.33% cut. During the day, Asia stocks fell after Fitch Ratings downgraded the US sovereign rating. Japan's Nikkei and China's Hang Seng ended over 2% lower as investors await the reaction of the US market later in the day.

    2) FII hand
    After pumping in about Rs 1.5 lakh crore on Dalal Street in FY24, foreign institutional investors have shown some signs of exhaustion in the last few days. Preliminary data shows FIIs sold Indian stocks worth Rs 93 crore in the last session.

    3) Profit booking
    July was the fifth consecutive month in which Nifty ended on a positive note. The market has rallied over 13% in the last 5 months, giving impatient investors a chance to book some profits.

    "Signs of exhaustion are evident at higher market levels, following a strong rally from the lows in March," said Santosh Meena, Head of Research, Swastika Investmart.

    4) Valuation concerns
    The one-way rally from the March lows has also brought valuations under stress and left little scope for an upside rally from here.

    Nifty is currently trading at 18.8x on a 12-month forward PE at 1std to its long-term average (16x) while it is trading slightly above the long-term average on a 12-month forward PB, according to Axis Securities.

    5) Bond yields
    US yields rose on Tuesday as investors expected an increase in government debt issuance and more signs of economic resilience, despite softening data. The 10-year yield stayed above 4%, despite some pullback after Fitch downgraded the government's credit rating to AA+ from AAA, citing fiscal deterioration over the next three years.

    The Indian rupee fell 36 paise to close at 82.85 against the US dollar amid strength in the greenback and foreign fund outflows over the past few days.

    6) Technical effect
    After a long time, Nifty has closed below its 20-day SMA and also formed a long bearish candle on daily charts which is largely negative. "We are of the view that 19450 would be the immediate support zone for the bulls. Above which, we could see a one quick pullback rally till 19580-19600. On the flip side, fresh selling pressure is possible only after the dismissal of 19450, and below the same the index could slip till 19400-19375," said Shrikant Chouhan of Kotak Securities.

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



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    (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2024 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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