Market Correction To Gather Momentum

The weakness seen in the Indian stock market during the trading week ended on Friday is expected to gather momentum in the coming week. Even as the Gross Domestic Product (GDP) figures released on late Friday evening indicated that India’s economic growth has marginally turned positive for the third quarter, ended on December 2020, is expected to be discounted as the foreign cues are not that encouraging. In the previous two quarters of 2021, India’s GDP contracted for the first two quarters.  

The benchmark indices Nifty (lower by 453 points) and the Sensex (lower by 1,790 points) ended in red for the second consecutive week with both shedding in excess of 3 per cent each. In the past two weeks, both have lost 4.36 per cent (634 points) and 4.98 per cent (2,444 points) respectively. On a daily chart, the Nifty and Sensex hit a low and closed below the lowest level of the previous week.

Investors in the western markets are shocked to see the sudden spurt in the bond yields, which has created a fear of rising inflationary pressure going ahead, resulting in the hike in interest rates, as growth in the world economy picks up. 

Global stocks fell on Friday, with Asian shares down by the most in nine months, as a fall in global bond markets sent yields flying and alarmed investors amid fears the heavy losses suffered could trigger distressed selling in other assets. Yields on the US 10-year Treasury note eased back to 1.494 per cent from a one-year high of 1.614 per cent, but were still up a startling 40 basis points for the month in the biggest move since 2016.

The indication of weakness to continue further was evident from the mixed close of Wall Street markets on Friday. Though Nasdaq recovered from low and ended marginally positive (up 0.6 per cent) on Friday, it closed the week with a loss of 4.9 per cent, its worst since last October as Tech stocks unwound some of their steep 2020 gains this week. The Dow Jones closed with a loss of 470 points (down 1.50 per cent). 

The losses we saw during the week in the domestic, as well as the western market, have still not wiped out the gains witnessed in February month. Both the Wall Street indices are still trading in positive territory as compared to their February opening. The Dow Jones is still 3.2 per cent higher and Nasdaq at under one per cent higher, compared to their February 2021 opening. Similarly, back home, Nifty and Sensex are also trading still in positive region as Nifty is up 248 points (1.74 per cent) and Sensex is higher by 2,666 points (5.74 per cent) compared to their opening level of the month.  

The severe fall on Friday in the domestic market was mainly because of a sharp fall in the banking sector stocks, which has seen a swift run-up in prices earlier in the month. The Bank Nifty was the top loser among the sectoral indices. Although all indices including the broad-based indices ended in negative territory, the mid and small caps outperformed their larger counterpart showing investor confidence. The Nifty Midcap index fell 1.6 per cent while the Small-cap index ended with losses of 1.2 per cent.

The India Volatility Index (India VIX) ended 22.9 per cent higher at 28.14, the highest since July 2020. VIX touched the intraday high of 29.64 and made the highest level of the last 169 trading sessions since 29th June 2020. The surge in VIX has given a tight grip to bears and likely to put pressure on the market at any bounce. February was also the most volatile month as Niffy saw the intra-month movement of 8.06 per cent (1,151 points) while the difference between the highest and the lowest level of the Sensex was 6,083 points (13.10 per cent).  

Monday will see the beginning of the new month and there are fair chances that weakness will further gather momentum in domestic markets. Dealers said, “We may see benchmark indices going to trade at January levels in the month of March.”  

The coming week may see participants eyeing important domestic data alongside the global cues. First, the auto sales data will start pouring in from March 1. On the economic front, Markit Manufacturing PMI and Market Services PMI data scheduled on March 1 and March 3 respectively. 

Going ahead, the rising bond yields continue to remain a key concern for equity markets worldwide, said Ajit Mishra, VP (Research), Religare Broking Ltd. 

Although the recent Fed statements have been comforting. Indications are pointing towards further slide in the Nifty and the next support at 14,400 and 14,200 levels. Mishra said, “We expect volatility to remain high so traders should maintain extra caution in risk management aspects. The prudent strategy would be to use rebound to create shorts using options instead of naked futures.”

Nirali Shah, Head of Research, Samco Securities advised market participants to keep an eye on bond yields and the movement of USD/INR, which could undergo some depreciation. 

“Investors in need of liquidity could book profits from certain stock pockets but long-term investors should continue to remain invested,” she concluded.