Liquidity crunch fears, Consistent selling by FIIs, rupee volatility, rising crude oil prices and trade war tensions weighed on sentiment.
The market continued to reel under selling pressure on Monday. Liquidity crunch fears, consistent selling by FIIs, rupee volatility, rising crude oil prices and trade war tensions weighed on sentiment.
The Nifty has broken psychological 11,000 levels, falling 175.70 points or 1.58 percent to 10,967.40. The 30-share BSE Sensex dropped 536.58 points or 1.46 percent to 36,305.02.
"We usually see such volatile moves prior to the market bottom or top but it's too early to confirm the same," Jayant Manglik, President, Religare Broking said.
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He advised traders should restrict leveraged positions, and in the meanwhile, prefer only hedged trades.
Investors, on the other hand, can start accumulating fundamentally sound counters on dips with medium to long-term view, he said.
Here are five factors that are dragging the market:
NBFC Debt Crisis
Nifty Financial Service index fell 2 percent which indicated that fears of liquidity crunch have not abated yet.
Stocks like Indiabulls Housing Finance, Bajaj Finance, M&M Financial etc. fell 5-7 percent. In addition, the country's largest housing company HDFC itself lost 6 percent, but DHFL recovered recovered some Friday's losses to close 12 percent higher. On Friday, DHFL lost 42 percent.
DHFL clarified that it has not defaulted on any bonds or repayment nor has there been any single instance of delay on any of its repayment of any liability, which boosted sentiment.
Redemption pressure forced DSP Mutual Fund recently to sell commercial paper of DHFL worth Rs 200-300 crore, which raised fears of liquidity crunch in the NBFCs. On top of that, expected interest rate hike may also be pressured NBFCs as most of them are wholesale funded companies.
DSP MF also have some exposure to IL&FS Group which defaulted on interest rate payments. This added more fuel to the fire and made investors worried.
Seeking to calm the nerves of worried investors, Finance Minister Arun Jaitley said today that the government would take all measures to ensure adequate liquidity for non-banking financial companies (NBFCs) and mutual funds.
RBI and capital market regulator SEBI on Sunday said they were closely monitoring the developments in the financial sector and were ready to take "appropriate actions" to calm the jittery investors.
Crude Oil Prices
Crude oil prices increased sharply as US markets tightened just weeks ahead of Washington's plan to impose new sanctions against Iran with will be effective from November. In addition, the expectations of major traders and banks that prices could rise over $90 per barrel in coming months also supported.
Brent crude futures were at $79.92 per barrel, up by 1.45 percent from their last close and US West Texas Intermediate (WTI) crude futures rose by 1.31 percent to $71.71 a barrel at the time of writing this article.
US commercial crude oil inventories are at their lowest level since early 2015. And while output remains around the record of 11 million barrels per day (bpd), recent subdued US drilling activity points towards a slowdown, reports Reuters.
Commodity merchants Trafigura and Mercuria said that Brent could rise to $90 per barrel by Christmas and even above $100 in early 2019 as markets tighten once US sanctions against Iran are implemented from November.
JP Morgan expects the sanctions could lead to a loss of 1.5 million bpd, while Mercuria warned that as much as 2 million bpd could be knocked out of the market.
Trade War Fear
The US-China trade war continues to be in focus as both countries imposed fresh tariffs on each other's goods today.
World’s biggest economies showed no signs of backing down from an increasing bitter trade dispute that has rattled financial markets.
US tariffs on $200 billion worth of Chinese goods and retaliatory tariffs by Beijing on $60 billion worth of US products took effect today morning (as per Indian time).
The two countries have already slapped tariffs on $50 billion worth of each other’s goods earlier this year.
Soon after the fresh duties went into effect, China accused the United States of engaging in “trade bullyism” and said it was intimidating other countries to submit to its will through measures such as tariffs, reports Reuters quoting official Xinhua news agency.
But Beijing also said it was willing to restart trade negotiations with the United States if the talks are “based on mutual respect and equality,” Xinhua said, citing a white paper on the trade dispute published by China’s State Council.
FPIs turn net sellers in September
Overseas investors have pulled out a massive Rs 15,365 crore ($2.1 billion) from the capital markets in September so far, after putting in funds during the previous two months, on widening current account deficit coupled with global trade tensions.
The latest outflow comes following a net infusion of close to Rs 5,200 crore in the capital markets, both equity and debt, last month and Rs 2,300 crore in July. Prior to that, overseas investors had pulled out over Rs 61,000 crore during April-June.
Technical Factors
The Nifty50 slipped below its crucial support placed at 11,100 levels in the first 60 minutes of trade on Monday. After Friday’s carnage, most analysts suggest that we might be in for some more volatility ahead of F&O expiry.
On the higher side, 11,200-11,220 will act as crucial resistance level for the index while on the downside 10,866 which was the intraday low recorded on Friday will act as crucial support for the index.
“A higher time frame i.e. the weekly chart shows that the index has formed a large bearish bar for the third consecutive week. The weekly momentum indicator has triggered a fresh bearish crossover. Thus the index is likely to continue with the fall & can target 10815 on the downside,” Gaurav Ratnaparkhi, Senior Technical Analyst, Sharekhan by BNP Paribas told Moneycontrol.