Sensex and Nifty plunge on global stock market sell-off; 5 key reasons behind the correction

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Updated: February 6, 2018 11:11:08 AM

The domestic benchmark indices seem to be in a freefall mode, and tanked more than 1,000 points on Tuesday morning, while the broader Nifty 50 fell by more than nearly 400 points. We explore five key reasons behind the domestic and global stock market correction.

The stock markets had closed in red for the third consecutive session on Monday. (Image: Reuters)

The domestic benchmark indices seem to be in a freefall mode, as the BSE Sensex tanked more than 1,000 points on Tuesday morning to 33,726 points, while the broader Nifty 50 fell by more than nearly 400 points to 10,276.08  . The stock markets had closed in the red for the fifth consecutive session on Monday. A market-wide sell-off pattern was observed in the Indian equities as the US benchmark index Dow Jones Industrial Average tumbled as many as 1,175.21 points on Monday, posting its biggest intraday decline in history shedding nearly 1,600 points. The slumps in the benchmark S&P 500 index and the Dow Jones Industrial Average were the biggest single-day percentage drops since August 2011, a period of stock-market volatility marked by the downgrade of the United States’ credit rating and the euro-zone debt crisis. What is causing such a correction in the domestic stock markets? If it’s just a wider reaction to the overall global turmoil, what is exactly causing a correction at the global level? We explore five key reasons behind the domestic and global stock market correction.

Concerns of rising inflation in the United States

While the current inflation rate doesn’t cause too much worry at 1.7% in the United States, investors are concerned about a possible hike in inflation, especially after a report released by Labor Department in the United states said that wages have shot up in the recent times. This fear may be justified as stronger than expected wage growth in the world’s biggest economy could mean sharper increases in interest rates should the US Federal Reserve feel the need to curb inflationary pressure.

Report of wage hikes causing worry in the United States

According to a US Labour Department report released on Friday,  private-sector wages and salaries in the United States rose 2.8 percent in the final three months of 2017 compared with a year earlier, the fastest growth since the recession. According to one school of thought, the rising wages will contribute negatively to the already high inflation. Thus, the domestic stock market correction, as measured by the fall in Sensex seems to be a reaction to the overall global markets.

LTCG tax concerns back home

The domestic benchmark indices Sensex and Nifty had reacted very sharply after Finance Minister Arun Jaitley introduced the long-term capital gains tax on equities from FY19. Analysts say that the stock market could remain under pressure in the near term as investors look to book profits before year-end. It is going to be trader’s market in the near-term, as opposed to an investors market, Asif Iqbal of Escorts Securities told FE Online, adding that investors will look to enter the markets after a correction of up to 15%.

New head at the Federal Reserve

In addition to the concerns regarding rising inflation and fed rate hikes in the near-term, the fact that there’s a new fed reserve head also lended some volatility to the US markets. Interestingly, Janet Yellen stepped down on Friday, and Jerome Powell, took over the reins.

Correction overdue

Even as the Sensex and Nifty react to the global stock market correction, market pundits say that a correction in the markets was overdue. “The sell-off in global equities and sovereign debt that started late last week and continued into Asia trading on Monday is more likely an overdue correction than a response to fears of inflation,”  JP Morgan said in its report.

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