Markets slip into red on fear of hawkish Fed, down 2.5% in two sessions

The benchmark indices posted their worst single-day fall in over two months as fears of the Federal Reserve's aggressive monetary policy and its impact on global growth resurfaced after a break-neck rally from this year’s lows in June.

Profit-booking after over 17 per cent gains in just two months added to this fall.

The Sensex ended the session at 58,774, down 872 points or 1.46 per cent — most since June 16, a day before the index hit this year’s low of 51,360. The Nifty50 index closed at 17,490, following a drop of 267 points or 1.5 per cent; only five of its components managed to end in the green.

The latest bout of risk aversion comes ahead of the Jackson Hole symposium on Friday. Fed chairman Jerome Powell’s speech at the central bankers’ gathering will be the key focus for the markets. Last week, two voting members of the Federal Open Market Comm-ittee emphasised the need to continue raising rates until inflation eased to the 2 per cent target.       

In the past two trading sessions, the benchmark indices have declined more than 2.5 per cent amid dwindling of foreign portfolio investor (FPI) flows with the yield on the 10-year US Treasury note once again heading towards the 3 per cent level. On Monday, FPIs sold shares worth Rs 454 crore; their domestic counterparts, too, were net-sellers to the tune of Rs 84 crore.

         

The rupee, too, weakened intraday but recovered later to 79.86 versus the dollar. Still, it slipped 8 paise over the previous close. India's 10-year bond yield, on the other hand, rose slightly to 7.27 per cent.

“Before the statements by Fed officials, the prevalent view was that inflation has been handled well and there won’t be many hikes required. But that has now backfired because of the recent statements. Moreover, there is no solution in sight to the geopolitical crises over Taiwan and Ukraine. The July flows to mutual funds were not good; people are taking money out of equities after a while. A lot of individual investors are booking profits. Even domestic institutions need to keep some dry powder as they may need some cash if there are more redemptions,” said U R Bhat, co-founder, Alphaniti Fintech.

The acceleration of Fed balance sheet reduction — also known as quantitative tightening — is another headwind facing the market. The availability of liquidity, along with low interest rates, fuelled one of the biggest bull runs in recent times, after the Covid-19 onslaught.

The recent spike in the dollar has led to concerns about the sustainability of the positive momentum in FPI flows. FPI flows in July and August helped the markets erase the losses they made in the preceding three months. In August, so far, FPIs have bought shares worth over Rs 46,013 crore.

All the major global indices, except the Shanghai Composite index, were in the red. The American markets, too, opened weak.

"In the absence of any domestic trigger, the focus has again shifted back to global cues. Even valuations are not supportive at the current levels. The markets are likely to consolidate in the near term, until the risk-reward turns favourable,” said Siddhartha Khemka, head of retail research, Motilal Oswal Financial Services.

All the 19 sectoral indices of the BSE ended in the red. The market breadth was weak, with 2,387 stocks declining and 1,172 advancing. ICICI Bank, the stock of which fell 2.1 per cent, contributed most to the Sensex decline. Tata Steel and Asian Paints were the biggest losers.