Sensex tumbles 1,407 points: Three factors behind market crash today

After trading on a tepid note for most of the session, the selloff in domestic markets gathered pace as European shares opened with sharp cuts.
A sharp crash in the domestic markets left investors running for cover in Monday's session as benchmark equity indices tumbled. The S&P BSE Sensex lost 2,037 points in intra-day deals to hit a low of 44,923.08. The index, however, recovered partially and ended the day at 45,554 levels - down 3 per cent, or 1,407 points.

On the other hand, the Nifty50 ended the day at 13,328 levels, down 3.14 per cent, or 432 points.

The fall was triggered amid weak global cues and fears of a resurgence of coronavirus following a new strain in the United Kingdom (UK). Over the past few sessions, the indices have been on a winning spree, hitting record highs almost daily on the back of gush of liquidity from overseas investors.

On Monday, the volatility index, India VIX, spiked 24.52 per cent to 23.19.

"The market failed to show resilience to stay above the Nifty 50 level of 13,750. While it is subjected to further price action evolution, the technical factors have shifted after the sharp correction today to support a further correction in the future. Any corrective wave down should find support around 12,990-12,960. As such, we advise the traders to refrain from building a new buying position until we witness a correction till 12,990-12,960 level. Volatility has expanded in today’s session, indicating profit booking and stock distribution at a higher market level," said Ashis Biswas, Head of Technical at CapitalVia Global Research.

Here are the key factors behind today's market crash:

Covid fears following new virus strain: On Saturday, the UK government announced a lockdown in various parts of the country, including London, saying that more than half of all new Covid-19 cases had been caused by a mutated, more infectious coronavirus strain. The new virus strain is said to be 70 per cent more transmissible. Following this, a number of countries, including India, imposed travel bans ahead of the Christmas and New Year holiday season.

Market participants are concerned that this new strain of the virus and consequent lockdowns and travel bans could hamper the pace of economic recovery.  

Weak global cues: The mood back home was also dampened by the weak cues from global peers. After trading on a tepid note for most of the session, the selloff in domestic markets gathered pace as European shares opened with sharp cuts.

European shares slumped as the rapid spread of a new strain of the coronavirus led to a more stringent lockdown in England and a travel ban from many countries, while a Brexit trade deal still hung in the balance, Reuters reported. London’s FTSE shed 2.1 per cent, Germany’s DAX 2.3 per cent and pan-European STOXX 600 index slid 2.3 per cent. In Asia, Japan's Nikkei shed 0.40 per cent while US futures were down 0.60 per cent, indicating a weak start for Wall Street.

Profit-booking: Since November, domestic markets have risen over 14 per cent amid massive liquidity, strong foreign fund inflows and development on the vaccine front. However, investors are shying from taking strong positions in the market in this holiday-shortened week and as we approach the Q3FY21 earnings season.

That apart, lack of interest from active foreign funds is also leading to weakness in bourses, analysts say.

"We have entered the holiday season and hence, the active participation of foreign funds will not be there. This has created a vacuum in the market. Moreover, investors are highly leveraged and even a small selling in the market has a cascading effect and that's what has happened today," AK Prabhakar, head of research at IDBI Capital said. 

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