Bloodbath on Dalal Street: Global indices nosedive, likely to continue

Gurumurthy K BL Research Bureau | Updated on February 06, 2018

Correction in global markets was long overdue; may correct up to 15%

It was a bloodbath in global equity markets on Tuesday. After the Dow Jones Industrial Average fell 4.6 per cent (1,175 points) overnight on Monday, Asian markets started to feel the heat when they opened on Tuesday. Japan’s Nikkei was down 4.7 per cent, China’s Shanghai Composite Index down 3.4 per cent, and Hong Kong’s Hang Seng Index was down 5 per cent. The Indian markets were no exception and it was a volatile day for India’s Sensex and Nifty 50. Both indices after tumbling 3.5 per cent intraday, managed to recover some of the losses and closed 1.6 per cent lower each.

The correction in the global equity markets has been long pending. Most of the major equity indices have had a sharp and mostly one-way rally without any major correction all through 2017. Take, for instance, the MSCI World index which surged 20 per cent in 2017 with just a minor correction of 2.5 per cent in August. Similarly, the MSCI Emerging Market index skyrocketed 34 per cent last year with a 5.4 per cent fall in the middle of this rally, between November and December.

Even the major individual indices across the world had witnessed a strong and continuous rally all through last year. All the major indices were up over 10 per cent. Germany’s Dax was up 13 per cent, Japan’s Nikkei was up 19 per cent, and South Africa’s JSE All Share Index was up 17 per cent. Indeed, many indices such as the US’s Dow Jones Industrial Average, Brazil’s Bovespa and India’s Sensex and Nifty 50 were up over 25 per cent.

The rally in these indices extended as the market stepped into the New Year 2018. The Sensex, Dow Jones Industrial Average, Shanghai Composite were all up over 5 per cent in January, making them overheated. As such the global indices were ripe for a fall.

While the correction in the global markets was much awaited and not surprising, it is just the pace of fall in the last few days that has shocked sentiment. Global indices have lost between 3 and 7 per cent in just three trading days. The MSCI World Index is down 5 per cent and the MSCI Emerging Market index is down 3.6 per cent.

The 3-7 per cent fall witnessed over the last few days is just the beginning of the corrective fall. Every bounce from now on is expected to bring fresh selling pressure at higher levels. As such, the sell-off can continue in the coming weeks and major indices can fall by about 15 per cent from their January peak levels.

Published on February 06, 2018

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