So, what has suddenly gone so wrong with markets worldwide
What happens elsewhere in the world overnight may come haunting your stocks the next morning!
In overnight trade, US markets saw their worst decline in eight months, as rising treasury yields and trade-related worries weakened risk appetite among equity investors, said Rahul Sharma, Senior Technical Research Analyst at Equity99.
The Dow slipped 831 points, while the Nasdaq fell 315 points, or 4.08 per cent.
“It looks like rotational trade is happening, as money is moving from risky assets to risk-free assets,” Sharma said. India, which was considered a relatively safe market a few weeks ago and is now fast losing its position after the rupee plunge and spike in crude oil prices.
Here is a detailed look at what has suddenly gone wrong with the markets.
Swinging US bond yields
By now, everyone knows a sharp drop in US stocks overnight wiped off Rs 4 lakh crore worth of domestic investor wealth on Dalal Street this morning ( READ MORE).
But what caused the US stocks to fall?
The US Fed is a happy lot these days. And it is not hiding its excitement. Atlanta Federal Reserve on Wednesday revised upward its economic growth forecast for September quarter to 4.2 per cent. In its last policy review, the Fed signalled one more hike by the year-end and three in 2019.
All this, along with data points showing strong US growth outlook has caused US bond yields to go through the roof. There are projections that the uptrend in US yields will sustain this year. This has widespread repercussions, and is making investors nervous, as rising cost of borrowing is bound to hurt corporate bottom lines in the months ahead.
Currency markets topsy-turvy
Rising US bond yields have created renewed buying pressure on the dollar, which in turn threatens to play havoc with currencies in emerging and other developed markets.
The shift in US bond yields is sucking funds out of emerging markets, putting pressure on currencies across emerging markets. The Chinese yuan has already taken a big knock, as Beijing fights a protracted trade battle with the United States. The rupee is down some 16 per cent for this year.
China’s central bank PBoC is allowing the yuan to gradually decline, breaking the psychological 6.9 a dollar mark. With its scale and size, a weakening of yuan threatens to disturb global trade equations with ramifications for all.
US fears trade war pain
In trade wars, no one wins or loses. China’s economic growth is at risk, but so is US’.
At a time when the US is embroiled in a trade war with China, the world’s second largest economy, rising cost of money can hurt US companies, especially when the trade war starts taking a toll on US corporate earnings sometime next year. US technology firms, and some of the manufacturers, are already feeling the heat.
This is precisely why President Donald Trump has been unhappy with the Fed. He wants the Fed to support the domestic industry by not hiking policy rates. It was the seventh time in the last eight quarters Fed hiked policy rate in September review. On Wednesday, he called the Fed crazy!
Rupee in for more pain
India’s rupee is already down some 16 per cent for the calendar year, quoting at a lifetime record low against the dollar. Renewed strength in the dollar can cause more pain for the rupee, which can further intensify the outflow of foreign portfolio investment.
Trump’s oil sanctions against Iran will take effect on November 4, which is another worry for countries like India, which is a large oil importer and runs a current account deficit.
A further drop in the rupee can further inflate India’s crude import bill, as crude is denominated in dollar, disturbing its trade account, and by extension, current account deficit.
The government’s decision past fortnight to cut excise duty on fuel has already tossed the fiscal math, triggering a warning from the Moody’s, which sees the development as credit negative.
Global growth worries real
IMF has cut global growth forecasts for 2018 and 2019, saying that the US-China trade war was taking a toll and emerging markets were struggling with tighter liquidity and capital outflows. IMF in an update to its World Economic Outlook predicted a 3.7 per cent global growth in 2018 and 2019, down from its July forecast of 3.9 per cent growth for both years.
On Thursday, the president of the World Bank said he is very concerned about trade tensions and warned of a “clear” global economic slowdown if tariff threats escalate. This depressed outlook hurt business confidence and investments across the globe.
Dalal Street already in panic
Domestic stock investors have been a worried lot over the past few weeks, amid a liquidity crisis in the NBFC sector, a free fall in the rupee and rising oil prices and their repercussions on the macros.
India’s equity investors have lost over Rs 20 lakh crore since August 30. On Wednesday, US President Donald Trump sent out a veiled threat to New Delhi over its $5 billion deal to purchase S-400 Triumf air defence system from Russia. India "will soon find out" his decision on the CAATSA sanctions, Trump said.
Political concerns thicken
Forthcoming state elections are being pitched as Modi’s acid test before the parliamentary elections scheduled for May. As the Opposition seeks to cobble together a coalition against the Modi-led BJP and raise fresh controversies to corner his administration, analysts and political observers are losing their earlier confidence about Modi’s chances of winning a second term. An adverse election result may bring in temporary uncertainty over policy continuity and make investors nervous.