Why have global markets fallen?
A resurgence of covid-19 infections, driven by the Delta variant, would make investors nervous. In the United States, the Dow Jones Industrial Average posted its largest drop in nine months on Monday. As a result, the fear gauge, the Cboe Volatility Index, or VIX, hit a two-month high. While there is still plenty of liquidity in the system, the increase in the number of covid cases has fueled doubts about the pace of the global recovery and inflation. Covid-induced growth worries sour sentiment across all asset classes, including raw and emerging market currencies, with bond yields weakening as well.
Which sectors, stocks were the victims?
Travel, tourism and hotels remain the most affected. Concerns over the reintroduction of lockdowns caused shares of InterGlobe Aviation Ltd (Indigo) to fall 5% on Tuesday. Shares of Indian Railway Catering and Tourism Corporation (IRCTC), Indian Hotels Company Ltd and Lemon Tree Hotels Ltd were also under pressure. While most sector indices ended today’s session in the red, the Nifty Metals index fell nearly 2.5%. Investors posted profits on metals stocks after the price of copper, an indicator of the health of the global economy, hit its lowest level in a month.
How is the results season going?
Profits for the June quarter in the US were decent, providing some support to equities. A widely held expectation is that Indian corporate earnings should look good thanks to last year’s weak base. But so far it’s been a mixed bag. Investors should beware of an increase in bad debts and delinquencies, especially after HDFC Bank’s weak first quarter earnings.
What are the prospects for liquidity?
Central banks have yet to reverse their lax monetary policy. In June, the US Federal Reserve left its key rate unchanged, but its forecast now points to an increase in 2023, a year earlier than expected. The Fed said in June that it had started talks on reducing bond purchases. Given that the US Fed is a trailblazer, an earlier-than-expected unwinding of quantitative easing programs would be a drag on stocks. The Jackson Hole meeting scheduled for August would be closely watched for clarity.
How severe is the correction?
Not very: it is barely 2 to 4% of the top. But, driven by abundant liquidity, Nifty 500 and S&P 500 are 33% and 26% above their pre-covid highs. This means that investors in global equities have taken the pandemic in its tracks. That said, the high valuation of Indian stocks makes analysts suspicious. Analysts warn of the foam, particularly in Indian mid and small caps, which have seen a massive rally with virtually no fundamental factors supporting them. So, according to analysts, the market was ripe for a correction.
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