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Why is Nifty and Bank Nifty falling?

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Published Date: 06 Aug 2024Updated Date: 31 Dec 20246 mins readBy MOFSL

As investors around the world woke up to another turbulent trading week, the Indian stock market was not spared from the thunders of global financial instability. On Monday, August 5,  benchmark indices in India opened with a significant gap-down, reflecting the broader concerns that have spread fear across global markets. The Sensex ended the day down 2.74% at 78,759, while the Nifty dropped 2.68% to 24,055. This decline comes on the back of heavy sell-offs in Asian markets, with indices in Japan, South Korea, and Australia witnessing declines of up to 6%, largely driven by mounting fears of a recession in the United States and escalating geopolitical tensions in the Middle East.

The market sentiment in India has been heavily influenced by the volatility in global markets, which has been compounded by fears of an impending U.S. recession. The recent surge in jobless claims in the U.S. has reignited concerns about the health of the world’s largest economy. This, coupled with the Federal Reserve's cautious stance on maintaining interest rates at historically high levels, has left investors jittery. The repercussions were immediately felt in the Indian markets, with the volatility index (VIX) soaring over 42% to 20.37, its highest level in nine years, marking a 52% rise since August 2015.

Beyond the economic indicators, geopolitical factors have also played a significant role in unsettling the markets. The Middle East, the hotspot of geopolitical tensions, is once again at the center of investor concerns. Israel's preparation for potential attacks from Iran-backed Hezbollah and the Islamic Republic has added to the anxiety, highlighting the risks of a broader regional conflict. The statement by Israeli Prime Minister Benjamin Netanyahu about being in a "multi-front war" with Iran and its proxies underscores the fragile state of affairs, with potential repercussions for global stability.

In the Indian context, the market saw a stark contrast between winners and losers. Leading the decline were heavyweights like Tata Motors, Adani Ports, ONGC, Hindalco, and Tata Steel, which faced significant sell-offs. Conversely, consumer-focused stocks such as Hindustan Unilever (HUL), Nestle, Britannia, Tata Consumer, and Apollo Hospitals managed to hold their ground, reflecting a shift in investor preference towards more defensive sectors amidst the uncertainty.

The technical picture for Indian markets indicates continued volatility with a bearish bias, primarily due to the multitude of global headwinds. The Nifty index is currently eyeing key support levels in the 23,250-23,400 range, with resistance expected around the 24,500-24,700 zone. Market participants should brace for volatile swings as the interplay of recession fears, yen carry trade unwinding, and Middle East tensions continue to unfold.

Amidst the market turmoil, public sector bank shares have seen significant profit booking, with investors squaring off long positions. Despite the current downturn, PSU banks such as State Bank of India, Bank of Baroda, Union Bank of India, and Canara Bank remain attractive long-term investments. These stocks are trading at relatively low price-to-earnings (PE) multiples, suggesting potential value for investors adopting a buy-on-dips strategy. The Nifty PSU Bank Index is currently navigating a tight range, with support at 6,400-6,500 and resistance at 7,100, setting the stage for potential breakout opportunities.

Adding to the complex global economic landscape is the Bank of Japan's recent decision to raise interest rates after years of ultra-low rates. This move aims to address concerns over the weakening yen and rising inflation, leading to a significant appreciation of the yen against the dollar. This shift has caught many investors off guard, particularly those who had bet on a continued decline of the yen. Japan’s pivot towards a more conventional monetary policy is not just a local affair; it has rippling effects across global financial markets, particularly amidst other factors like the U.S. recession threat and the escalating Middle East conflict.

The Bank of Japan's policy shift has been mirrored by market reactions globally. On August 5, Japan's Nikkei index plunged over 14%, and the yen rallied by more than 1% in anticipation of continued monetary tightening. U.S. futures markets have also reflected these global anxieties, with S&P 500 futures down 2.64% and Nasdaq futures nearly 5%. The overarching concern is that the Fed's decision to maintain interest rates at a two-decade high could exacerbate the economic slowdown, leading to deeper market corrections.

All-in-all, the recent gap-down opening of Indian markets underscores the imminent impact of global economic and geopolitical forces on domestic sentiment. With recession fears, monetary policy shifts, and geopolitical tensions at play, investors must navigate a challenging landscape. The focus will remain on how these global developments unfold and their implications for the Indian market. As the world watches closely, the road ahead for investors is likely to be filled with volatility, but also potential opportunities for those who can strategically weather the storm.

 

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Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
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