Taking Stock: Manic Monday, Sensex plunges over 600 points; 5 factors that weighed on D-St

It was a Manic Monday on D-Street as the Indian market slipped to a two-week low that saw S&P BSE Sensex tank more than 600 points and the Nifty50 slipping below its crucial support at 11,000.

The S&P BSE Sensex ended 667 points lower at 36,939 on August 3, while the Nifty50 closed with losses of 181 points to 10,891.

"Indian benchmark indices closed in the negative with losses, following mixed global cues. As virus cases continued to rise and with the uncertainty regarding rate actions by the RBI, markets succumbed to the momentum slowdown visible in the last couple of trading sessions," Vinod Nair, Head of Research at Geojit Financial Services told Moneycontrol.

Financial stocks led the losses. Though momentum slowed down, stock-specific action was still happening, depending mainly on earnings results and commentary, he said.

“As long as the markets hold the current range, these downturns could be short-lived and should be utilised to accumulate quality stocks," Nair said.

Sectorally, action was visible in consumer durables, healthcare, and metal stocks, while selling-pressure was visible in Bankex, finance, and energy space.

The broader markets outperformed the benchmarks. The S&P BSE Midcap index was down 0.31 percent while the S&P BSE Smallcap index closed with gains of more than a percent.

Here is a list of factors that could have weighed on markets:

Weak global cues

The Indian market woke up to muted global cues. World stocks began August cautiously as US lawmakers struggled to agree on a new stimulus plan following a global surge of COVID-19 cases, a Reuters report said.

On July 31, Fitch Ratings cut the outlook on the United States’ triple-A rating to negative from stable, citing eroding credit strength and a ballooning deficit, said the report.

Contraction in factory data

The slowdown fears are here to stay as India’s factory slump deepened in July on renewed lockdown measures to contain surging coronavirus cases.

The Nikkei Manufacturing Purchasing Managers’ Index, compiled by IHS Markit, fell to 46.0 in July from 47.2 in June, below the 50-level separating growth from expansion for a fourth straight month and marking its longest spell of contraction since March 2009, said a Reuters report.

A further decline in new orders and output signaled weakness in overall demand despite factories again cutting their prices, leading firms to reduce their workforces for the fourth month in a row, it said.

Financials led the fall on D-Street

Financial stocks led the fall on D-Street, with the NiftyBank registering a decline of more than 2 percent, while the S&P BSE Bankex was the top loser among sectoral indices on the BSE.

The fall was mainly led by losses in RBL Bank, Kotak Bank, Axis Bank, HDFC Bank, ICICI Bank, and IndusInd Bank.

This comes two days after Finance Minister Nirmala Sitharaman said the government was working with the Reserve Bank India (RBI)  on the need for restructuring of loans to help industry tide over the impact of COVID-19.

Also Read: Finance Ministry working with RBI on need for loan restructuring: Sitharaman

Sitharaman said the ministry was working with RBI on the demand of the hospitality sector for extension of the moratorium, or restructuring of loans.

The Bank Nifty continued its weakness for the fourth consecutive session and broke below its 50-days EMA on a closing basis, which was acting as key support for past two months.

It corrected by around 2,200 points from 23,200 to 21,000 zones in the past nine trading sessions and has come close to its previous swing low of 21,000.

“The NiftyBank has been making lower top-lower bottom formation and resistances are gradually shifting lower,” Chandan Taparia of Motilal Oswal Financial Services Limited said.

“Till it holds below the 21,600 zone, weakness can be seen towards 20,500 and 20,250 zones while on the upside, immediate hurdles are shifting to 21,600-21,800 zones,” he added.

Rising coronavirus cases

India's count of known coronavirus cases surpassed 18 lakh on August 3, mirroring the trend of a rapid rise in infections in several parts of the globe.

The United States is in a new phase of the novel coronavirus outbreak with infections “extraordinarily widespread” in rural areas as well as cities, said a Reuters report, quoting White House coronavirus experts.

The coronavirus, which first appeared in China, has infected 4.6 million people in the United States and killed more than 155,000 Americans, according to a Reuters tally.

The rise in cases remains to be the biggest risk for equity markets in the second half of 2020, say experts. “Elongated COVID-19 led lockdown and casualties is the biggest risk in second half of 2020,” Deepak Jasani- Head of Retail Research at HDFC Securities told Moneycontrol.

Atul Bhole, Senior Vice President–Investments, DSP Investment Managers, said the worsening of the COVID curve could derail the recovery process and less than expected uplift in consumption post the initial pent-up demand was also a cause of concern.

Profit booking at higher levels

After two straight months of vertical gains in the benchmark indices, some bit of profit-taking was expected in August after the Nifty50 and S&P BSE Sensex rallied more 7 percent in the previous month.

Profit-taking was seen in sectors that have run up in the recent past. “The market has shown over 7 percent upward move in July. The market has extended its gain for the fourth consecutive month, forming a higher high,” Rajesh Palviya, Head - Technical and Derivative Research, Axis Securities told Moneycontrol.

“The market has shown a strong run-up in the last three-four months. The index failed to cross the 11,300 level and witnessed profit-booking at a higher level,” he said.

India VIX moved up by 4.11 percent at 25.18 levels. The spike in volatility could cause some decline in the market.