Equity markets fell for a third consecutive session on Thursday amid a risk off sentiment globally due to rising US bond yields. The yield on the 10-year US government security climbed to over 4.17 per cent — highest in nine months — undermining the confidence in the equity markets. The rise in US yields was on account of the US Treasury raising its issuance target and Fitch Ratings’ downgrade of US debt. Rising bond yields tend to dim the appeal for equity investments.
The Sensex fell 542 points, or 0.82 per cent, to close at 65,241 — its lowest in a month. After dropping to a low of 19,296, the Nifty50 closed at 19,382, down 145 points, or 0.74 per cent. The Sensex and the Nifty50 are now down close to 1.8 per cent each in the past two trading sessions, their worst two-day fall since March 14 this year.
Analysts said that concerns had emerged about the sustainability of market gains amidst weak economic data from India and abroad. The rising Treasury yields and Fitch downgrade have further worsened the sentiment.
Most global markets extended losses after the Bank of England (BoE) raised interest rates by a quarter of percentage point. The British pound fell to its lowest level against the dollar since late June after the BoE raised rates to 5.25 per cent.
“The recent weakness seen in the pound is due to a broad-based strength in the US dollar as a short-term safe haven refuge triggered by global risk-off behaviour in the aftermath of Fitch’s US sovereign debt credit rating downgrade to AA+ from AAA.,” said Kelvin Wong, senior market analyst, Asia Pacific, Oanda.
On Thursday. foreign portfolio investors (FPIs) sold shares worth Rs. 317 crore, while their domestic counterparts were net buyers to the tune of Rs. 1,729 crore. Lately, FPIs are seen trimming their exposure to the domestic markets amid concerns around rising valuations.
“We have gone up a lot, and markets are not cheap. And we need a time and price correction to absorb the rally. The US downgrade triggered the correction,” said Jyotivardhan Jaipuria, founder of Valentis Advisors.
Analysts added that the recent news flows have prompted foreign institutional investors to book profits and take some money off the table.
The collections from the corporation tax declined nearly 14 per cent year-on-year (YoY) to Rs. 1.38 trillion in the first quarter of ongoing financial year. Analysts attributed the decline to falling margins. Moreover, weak manufacturing data from China has led to speculations about more stimulus measures and a shift of FPI money to the country.
News reports on Thursday suggested that China’s central bank will cut the reserve-requirement ratio for major banks this month to boost lending and aid economic recovery.
On the day, the market breadth was weak, with 1,847 stocks declining and 1,716 advancing. More than two-thirds of the Sensex stocks declined. ICICI Bank, which fell 2.24 per cent, and HDFC Bank, which went down 0.7 per cent, were the biggest contributors to the Sensex’s decline.
Barring three, all sectoral indices on the BSE fell. Realty stocks declined the most, and their index on the BSE fell 1.8 per cent.
Analysts pointed out that the next round of triggers for a rally would be in the second half of September when the effect of the government spending and private capex will start to show in earnings. Investors will also be keenly tracking the non-farm payroll data in the US to gauge the trajectory of rate hikes.