Sensex tanks 938 points: Key factors behind the market crash

Global stocks are mostly treading water near record highs as US corporate earnings roll in
Led by losses in index heavyweight Reliance Industries, private lenders and select IT stocks, benchmark indices extended their losses to the fourth day on Wednesday.

Weak global markets, a mixed set of Q3 earnings and selling by foreign institutional investors (FIIs) dented the domestic market mood in today's session. Meanwhile, investors chose to book profits ahead of the Union Budget on Monday, February 1.

The BSE barometer Sensex plunged 938 points to 47,410 while its NSE counterpart Nifty slipped below the 14,000 mark to end at 13,968, down 271 points.

The broader market trend was mixed with Nifty Midcap 100 and Nifty 500 indices down 1.58 per cent and 1.68 per cent, respectively, while Nifty Smallcap index added 0.15 per cent.

The volatility also remained high ahead of the monthly F&O expiry on Thursday, with India VIX rising 4.93 per cent to 24.39 level.

Here are the top factors behind the market crash today.

Weak global cues

 
Asian equities slipped on Wednesday as investors looked to the Federal Reserve's guidance on its monetary policy while futures for US tech shares jumped after strong earnings from Microsoft. European stocks are expected to slip a tad, with EuroStoxx 50 futures down 0.3 per cent and FTSE futures shedding 0.4 per cent.

Global stocks are mostly treading water near record highs as US corporate earnings roll in. Meanwhile, new coronavirus variants that sparked fresh lockdowns and other restrictions are weighing on the market mood.

Frustration over vaccine distribution is also increasing. In a Facebook post last week, Italian Prime Minister described delays in consignments by Pfizer Inc. and AstraZeneca Plc as “unacceptable” while the UK’s health minister warned that vaccines may be less effective against new variants of the coronavirus.

That apart, investors are also seeking more clarity on the timeline for President Joe Biden’s $1.9 trillion Covid-19 relief plan. "Delay in US paycheques and overall correction in global markets are driving indices lower. Liquidity is a critical factor right now and any fall in liquidity will lead to a sharp fall in markets," said Abhimanyu Sofat, Head of Research at IIFL Securities.

Budget blues

 
The Union Budget, set to be unveiled on February 1, is a highly anticipated affair as it comes on the heels of a pandemic that has altered India's economic landscape. Amid this backdrop, investors have booked profits and are waiting on the sidelines.

The government needs to raise resources to help increase spends, but analysts at Bernstein believe equity markets will consider any form of tax increases negative. Those at Credit Suisse, on the other hand, caution against the limited spending room the government has.

"While the government appears to be willing to spend now, as it believes the growth multiplier would be higher in an economy without Covid-19 restrictions, Rs 4.2 trillion of extra spending may be difficult to execute. It may choose to be conservative on GDP growth assumptions, and also target a lower deficit, which would imply 13 per cent total expenditure growth. In this scenario, spending on residual heads could be 40% higher than in FY20, but the absolute increase a more reasonable Rs 2.5 trillion," wrote Neelkanth Mishra, managing director, co-head of Asia Pacific Strategy and India equity strategist at Credit Suisse in a recent report co-authored with Abhay Khaitan and Prateek Singh.

Q3 earnings

In the December quarter earnings season, the companies have posted a robust performance but this was mostly pencilled in by the market. However, a performance by Reliance Industries disappointed investors, leading to a massive fall in the company's shares and subsequently the benchmark indices. Going ahead, analysts are concerned about lower margins. "We are lowering in expectations for forthcoming quarters on margin front as they are expected to peak out in the current quarter," said Sofat.

Valuation concerns

The market is overvalued from the perspective of PE multiple and market-cap to GDP ratio. The overvaluation is more than 50 percentage points higher than the historical average. "Profit-booking is normal, particularly when valuations are high, like now," said Vijay Kumar, adding that such profit-taking is healthy and desirable.

F&O expiry / Tech View

 
For the third consecutive session on Monday, Nifty50 formed a Long Bear Candle. "The three sessions consecutive decline was formed in the market after the time span of four months. Hence, this pattern could be in-line with the reversal formation in the market at the highs. The last swing high of 14,753 of January 21 could be a reversal high for the near-term," said Nagaraj Shetti, Technical Research  Analyst at HDFC Securities in a note on January 25. Nifty on the weekly chart, formed a Doji and high wave-type candlestick pattern back to back in the last two weeks, Jasani said, adding that this market action could be considered as a beginning of major profit booking in the market from the high. 


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