The government’s capitulation to the global crude oil shock coupled with fears of a monstrous move in US treasury yields ahead of key economic data on Thursday set off a stock market rout. The Sensex crashed by 806 points or 2.24 per cent to close at 35,169; Reliance Industries, the most liquid counter in the domestic stock market, fell 6 per cent, its steepest decline this year.

The broader index Nifty of the National Stock Exchange slumped 259 points or 2.39 per cent at 10,599. The fall in key indices left traders rattled: the Nifty and the Sensex are now down close to 10 per cent from their peak in August, and some of the bellwether stocks have crashed by over 20 per cent in the past few weeks, exerting pressure on institutional investors.

Key indices fall

While the negative cues in domestic markets seem to have dragged down key share indices for the past couple of weeks, the price movement in US treasury markets will drive sentiments from here on, market experts told BusinessLine . The US dollar’s sharp rise due to stronger-than-expected economic data there weighed on the rupee, which touched a new life-time low of 73.81 on Thursday.

“Foreign institution selling in India is purely driven by fear that the rupee will depreciate further. It may well continue till the rupee stabilises,” said Deven Choksey, founding promoter, KR Choksey Investment Managers.

The share prices of oil marketing companies (OMCs), including HPCL, BPCL and IOC, touched a 52-week low as the government asked them to absorb a part of the loss from a cut in the excise duty on petrol and diesel. Brokers said RIL was a victim of selling by large traders who anticipate that the company’s margins too will be hit as sales will be impacted.

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Finance Minister Arun Jaitley announced that the government has cut the excise duty on petrol and diesel by ₹1.50 per litre, and that OMCs will absorb a cut of ₹1 per litre. This would result in an estimated loss of ₹10,000 crore collectively for the OMCs.

The yield on the benchmark US 10-year Treasury note climbed 12 basis points on Wednesday, hit its highest level since May 2011 on Thursday at 3.232 per cent, which led the dollar to gain more strength globally.

Fears of a global bear market in stocks are running high. JPMorgan’s strategist John Normand reportedly announced last week that they had “adopted a new baseline that assumes a US-China endgame involving 25 per cent US tariffs on all Chinese goods in 2019” because “the US and China will not resolve their differences this year and the Administration will make good on its threats to escalate.”

Such a full-blown trade war “could take $8 off consensus 2019 EPS projections of $179 and reduce next year’s EPS growth from 10 per cent to 5 per cent year-on-year”, with JPMorgan predicting that this could “potentially end the US stock market rally even assuming a forward multiple of 17, unless some other offset materialises.”

 

Published on October 4, 2018