Rs 3.2 trn of investor wealth wiped off. Why did the Sensex fall on Friday?

The market's confidence has been shaken as persistently elevated levels of commodity prices, and disrupted supply chains continue to be a double whammy for the economy and companies alike.

Five months into calendar year 2022, equity markets still continue to be on slippery ground. June, too, has begun on a volatile note as investors tread cautiously amid soaring inflation and rising rates. On Friday, the markets lost ground with the S&P BSE Sensex and Nifty 50 indices sinking up to 1.8 per cent each and eroding around Rs 3.2 lakh crores of investor wealth, showed data on BSE.

A day after ending on a positive note, the Sensex dropped 1,017 points and the Nifty slipped 284 points to close at 16,193 level on Friday.

The market’s confidence has been shaken as persistently elevated levels of commodity prices, and disrupted supply chains around the world continue to be a double whammy for the economy and companies alike, analysts said.

"Strengthening of the US 10-year bond yield to 3.05 per cent can be interpreted as the market discounting worse-than-expected inflation data in the US on Friday. If inflation data turns out to be worse-than-expected, equity markets will turn bearish. If it doesn't, markets will stage a rebound next week. Calibrated buying on dips in high quality banking and IT stocks can fetch good returns to investors in the medium- term," said V K Vijayakumar, chief investment strategist at Geojit Financial Services.

Let’s closely look at the factors that tanked the domestic equity markets on Friday:

Global markets plunge: US markets sharply dropped overnight as inventors anticipated a rise in inflation, which may prod the US Federal Reserve (US Fed) to get even more aggressive with rate hikes. Investors worry that consequently, a recession remains on the cards. Besides, the Fed’s rate-setting committee will meet next week, where it will likely deliver another rate hike of 50-bps.

Most Asian markets also fell on Friday as China’s producer price index and consumer inflation rose 6.4 per cent and 2.1 per cent, respectively, from a year ago. These were, however, in line with market’s expectations.  

ECB signals first rate hike in a decade: The European Central Bank (ECB) on Thursday announced that it would take a 25 bps rate hike at its next meeting in July. This would be the first increase in interest rates in around 10 years.

Further, the bank expects a further hike at the September meeting as well. It also downgraded the growth forecast to 2.8 per cent for 2022, and raised the inflation estimate to 6.8 per cent from 5.1 per cent projected in March.

Return of lockdown in Shanghai: China’s business hub Shanghai has again been put under restrictions just after the city-wide lockdown was lifted on June 1. The reimposition of a lockdown in the major Chinese city is weighing on markets, as likely supply disruptions threaten India Inc’s profitability prospects.

India’s rising Covid-19 tally: A fresh uptick in Covid-19 cases across the country, especially in Maharashtra, has made market participants nervous as any possible restrictions may derail the economic recovery. India has been reporting over  7000 cases since Wednesday, the highest after January. A total of 7,584 cases were reported today.

Surging crude and weaker rupee: Oil prices have sustainably stayed above the $120 a barrel mark for some time now. This, coupled with, a weaker rupee poses a major threat to India’s already widening current account deficit. Brent was trading at $122/bbl, while the rupee touched a new low of 77.82 to a dollar in today’s trade. Moreover, a depreciating rupee can further dampen foreign investors' confidence, which are already on a withdrawal spree from Indian equities.