With US Federal Reserve chairman Ben Bernanke not announcing any big stimulus for the US economy and, in fact, cautioning that the financial markets were strained, stock markets across the globe capitulated on Thursday. With no resolution to the sovereign debt crisis in the euro zone, money continued to move into safe haven US Treasuries ? as it has over the past month ? sending the yield on the 10-year Treasury to 1.7723%, the lowest in about six decades. The rise in risk aversion across the world hurt India?s equity markets too, with the Sensex crashing 704 points and Nifty giving up 210 points to close below the 5,000-mark. Between August and now, investors have lost R5.36 lakh crore in wealth; India is now among the worst performers with both benchmark indices losing 20% since January and the market capitalisation down to R60 lakh crore.
The global meltdown on Thursday was reflected in the resounding crash of the MSCI Emerging Markets Index, which plunged 7% and has now lost more than 17% since January. The Dow Jones Industrial Average was down 3.2% in early trades after giving up 2.5% on Wednesday. Investors were skittish across Asian markets, with the Hang Seng coming off a steep 5% and the Nikkei down 2%.
Moreover, all major European indices, including France?s CAC 40, Germany?s DAX and the UK?s FTSE 100 were trading 4% lower than Wednesday?s closing levels. The MSCI All-Country World Index retreated 2.7% at 8:31 am in New York, extending declines from its May peak to more than 20%, Bloomberg reported. Thirty-year treasury yields fell to 2.8205%, with German 30-year yields also dropping to an all-time low. The Dollar Index rose as much as 1.6% while the euro lost 1% against the greenback. The 17-nation euro fell to its weakest level versus the greenback since February.
Tracking the meltdown, the R plunged 124 paise to close at a near two-and-a half year low of 49.57/58 against the dollar.
Traders and bankers said the Reserve Bank of India intervened in the forex market to arrest the fall of rupee, but with little success. However, there was no official comment on RBI?s intervention. Forex dealers said the rupee plummeted as importers and rushed to buy dollars amid its sharp rise in the overseas markets to a seven-month high against major currencies. The sharp fall in rupee comes at a time when the government is battling high inflation. A weak rupee will make imports of petroleum products costiler impacting prices.
After the two-day meeting of its open markets committee, the Fed announced on Wednesday it would replace $400 billion of short-term debt with longer-term Treasuries to stimulate growth after the US economy grew just 0.1% in the June quarter. It said there exist ?significant downside risks? to growth. The absence of a Quantitative Easing-III, which was anticipated by some sections of the market, disappointed investors. ?Markets are pricing in the Fed?s policy and the absence of any major initiatives appears to have disappointed markets worldwide,? said Andrew Holland, CEO, Ambit Capital, adding that volatility may continue till markets see more decisive action from policymakers in the US and Europe.
Slowing growth across economies are spooking investors who expect more earnings downgrades. The downtrend in commodity prices, including that of crude oil which was trading at close to $107 per barrel, failed to enthuse investors. Earlier this week, the International Monetary Fund lowered its estimates for global growth for 2011 to 4% even as economists believe China?s factory output could shrink for a third month in September.?
According to Sivasubramanian KN, CIO, Franklin Templeton Investments, European sovereign debt concerns, while not impacting India significantly, could hurt fund flows through a change in global risk appetite. ?In that sense, even as the region experiences stronger growth, the direction of the market is likely to be influenced by global factors and any negative development could weigh on returns,? Sivasubramanian added. Between January and now, FIIs have bought stocks worth $280 million although they are understood to have sold stocks worth around $260 million on Thursday. Thursday?s fall in the Sensex was the 14th biggest fall since 2001. The Nifty closed at 4,923.65 points. At 1900 IST, SGX Nifty September future, the index future on Nifty on Singapore Exchange, was trading at 4,883 points, down 25 points.