On 26 February, you could not have said, “Thank God, it’s Friday”, at least not if you were a stock trader. The indications of a market correction were there with SGX Nifty hinting at gap down opening. But that was hardly reflective of the carnage to follow. By the time, the markets closed on 26-Feb, the Nifty had lost 568 points and Sensex had lost 1939 points. The sell-off was broad-based and relentless.
Bond yields firmed up further
Evidently, the correction was across the board with defensive sectors like IT, Pharma and FMCG taking less of a hit. The correction was extremely sharp in sectors like metals and private banks that had driven the rally during the month of Feb-21. Why exactly did the Nifty and Sensex correct so sharply on 26-Feb?
That has been the real threat to the equity markets in the last few weeks. It began with the US bond yields touching 1.40% on Thursday. The bond yields had touched a low of 0.68% a few months back and the rally has been extremely sharp in recent times. The 10-year bond yields in India also shot up to 6.23% on Friday, gaining 45 bps since middle of February. Higher bond yields reflect the fear that RBI could hike repo rates and that is not great news for corporate balance sheets or for equity valuations.
Geopolitical risk is back with Syria airstrikes
After a long break, geopolitical risk was back in the most volatile playground of the Middle East. The US conducted targeted airstrikes on facilities near the Iraqi border. The actual intent was to retaliate to the recent strike by Iran on US facilities. For long, the US has held the view that Iran tacitly supported the high-handed Assad regime. The real problems may begin if Iran retaliates, as is very likely.
In 2018 and 2019, under similar circumstances, Iran had virtually blocked the Strait of Hormuz, which moves nearly 30% of the international oil and gas cargo. Anything like that would lead to a spike in oil prices, which is already elevated at $65/bbl.
Slowdown in FPI buying activity
That has been a trend that quietly building up in the second half of February. While the Union Budget had resulted in FPI euphoria, they have been net sellers on most days in the last two weeks. Even on 24 Feb, when the net FPI inflow was Rs28,500cr, the effective inflow was negative if you excluded the Bosch block deal. On Black Friday, the FPIs sold close to Rs9,000cr in equities with hints of basket selling by large long-only investors.
Concerns over growth trajectory
There were concerns ahead of the GDP announcement on Friday, that the data could flatter to deceive. The actual data showed 0.4% GDP growth but there were two concerns. Agriculture was robust and industrial growth was picking up, but services still left a lot to be desired. Secondly, the GDP growth may actually be optical since the base effect had been modified by lowering the GDP growth for Q3-FY20. If that effect was eliminated then even Q3 GDP growth would have been negative. In fact, the National Statistical Office has actually downgraded the full year GDP contraction for FY21 from -7.7% to -8.0% due to limited traction in services. These growth concerns become more pronounced when you consider that market indices are already at elevated valuations.
NSE Trading halt on 24-Feb has made traders cautious
One can argue that rising Coronavirus cases are worrying markets but that is more of a peripheral issue. There is general confidence that with mass vaccination, India should be able to get over the recent spike in cases. The bigger worry for most traders comes in the aftermath of the trading halt on the NSE on 24-Feb, which is still to be fully understood.
Traders do not want to be stuck with leveraged positions like on 24 February when trading remained shut for over 4 hours with little visibility about the outcome. While the bounce on 24-Feb and 25-Feb was on account of short covering, it was a return to reality on 26 February. That perhaps best explains why there was a virtual rush among traders on Friday to unwind leveraged positions. That also, perhaps, exacerbated the sharp fall in the markets!