Black Friday: Sensex, Nifty down; Covid, recession fears weigh on sentiment

It seems to be a Black Friday for the global equity markets as they reel under selling pressure.

The Indian stock market had been resilient until earlier this week when the selloff started. The benchmark 30-pack Sensex fell 981 points, or 1.6 percent, to 59,845 at close am on December 23. The broader Nifty 50 dropped 321 points, or 1.8 percent, to 17,807.

A day earlier, the US markets reversed their positive trend and closed with losses. Rising fears of economic recession and the US Federal Reserve continuing to increase interest rates to battle inflation dragged the tech-heavy Nasdaq lower by more than 2 percent, while the Dow Jones Industrial Average and the S&P 500 lost more than 1 percent each.

Barring pharma, all sectoral indices in India, including the broader market, traded in the red. The India VIX index, which indicates the degree of volatility traders expect over the next 30 days, was up 3.4 percent to 15.7 from 15.2.

Major factors contributing to the global selloff are:

US Fed to continue rate hikes

Major US economy indicators still show encouraging growth trends and this may prompt the Fed to continue increasing interest rates for a longer duration than expected earlier. Recent signals from Fed members indicate rate hikes could continue well into next year. A higher interest rate regime is negative for the equity markets and global indices have responded expectedly.

“US stocks ended well off session lows but still fell sharply after a round of upbeat economic data and a warning from hedge-fund titan David Tepper that he was ‘leaning short’ against both stocks and bonds on expectations the Federal Reserve and other central banks will continue tightening into 2023,” said Deepak Jasani, head of retail research at HDFC Securities.

A revised reading of third-quarter GDP showed the US economy expanded more quickly than previously believed. Growth was revised up to 3.2 percent from 2.9 percent in the previous update last month.

On December 21, the Bank of Japan had given a clear message that it will continue to keep interest rates elevated to combat inflation.

Recession fears loom large

With core inflation remaining sticky in most economies, monetary tightening will likely continue. This increases the probability of large economies falling into a recession and experts see diminishing chances of a soft landing for the US economy. This will aggravate the problems of financial markets.

Japan’s core consumer inflation hit a fresh 40-year high of 3.7 percent in November as companies passed on rising costs to households, data showed December 23, a sign that price hikes are spreading to broader sectors.

Technology stocks in the US were battered after a gloomy outlook from chipmaker Micron Technology weighed on sentiment.

Rising negativity on spread of COVID

The markets are getting spooked by rising COVID cases and increasing number of deaths in China, which might push its economy further on the backfoot. A few cases of the Omicron variant found in India and advisories issued by the government added fuel to the fire.

Negative global market cues

Asian equities resumed declines on December 23 amid a downbeat tone after the slump in US tech stocks and data that validated the case for hiking rates. The SGX Nifty, KOSPI, Taiwan Weighted and Nikkei 225 fell more than 1 percent each.

“While our projected target of 17,900 has continued to attract prices lower, positive divergences in oscillators are beginning to show up, reducing the odds of falls beyond the same,” Anand James, chief market strategist at Geojit Financial Services suggested, while presenting the outlook for the Nifty.

He expects the trend to reverse once the Nifty is in the vicinity of 18,000, but the inability to scale 18,250 on the bounce would confirm a downtrend to 17,670 initially.