A slump in Chinese equities on Monday sent global markets tumbling, with Indian equities posting their biggest one-day decline in two months driven by a wide-ranging sell-off. Recommendations by the special investigative team for stricter norms on participatory notes (P-notes) to curb black money into India were also perceived to have had a negative impact on foreign fund inflows.
Foreign portfolio investors (FPIs) net sold more than $130 million of Indian shares — the biggest single-day sale since May 12 — according to provisional stock exchange data. FPIs have pumped in $1.1 billion so far this month. Year-to-date inflows stand at $7.27 billion, Bloomberg data showed.
The Sensex declined 550.93 points or 1.96% to end at 27,561.38. The Nifty fell 1.88% or 160 points to settle at 8,361.
Forty-six out of the 50 Nifty constituents ended negative, with shares of eight companies hitting their lowest levels in 52 weeks.
Profit booking was also evident in broader markets with BSE Mid- and Small-cap indices falling more than 1% each. Both indices had gained 5-6% in the last one month.
“The sharp reaction is more to do with global events. I don’t expect much of market volatility unless the US central bank announces something drastic at its Federal Committee meeting this week,” said UR Bhat, MD, Dalton Capital Advisors.
The Dalton Capital Advisors MD said that the P-notes issue will not have a significant bearing on Indian markets.
The US Federal Open Market Committee will meet on Tuesday and Wednesday to determine the future course of its monetary policy.
Tata Motors retreated to a 16-month low amid concern that China sales of its Jaguar Land Rover unit may slow. Tata Steel and Vedanta, India’s top copper producer, slid to their lowest since August 2013.
Copper extended losses from a six-year low and industrial metals declined as equities plunged the most since 2007 in China, the world’s biggest user of raw materials from aluminium to zinc. The Sensex slid 1.2% last week as earnings from some of India’s biggest companies disappointed investors.
Larsen & Toubro, the most valuable engineering company, sank the most in two months, and ICICI Bank extended last week’s 5% plunge.
China’s stocks tumbled, with the benchmark index falling the most since February 2007, amid concern a three-week rally sparked by unprecedented government intervention is unsustainable.
The Shanghai Composite Index plunged 8.5% to 3,725.56 points at the close, with 75 stocks dropping for each one that rose. PetroChina, long considered a target of state-linked market support funds, tumbled by a record 9.6%. The rout dented investor confidence from Hong Kong to Taiwan and Indonesia, helping send the MSCI Emerging Markets Index to a two-year low.
Monday’s retreat shattered the sense of calm that had fallen over mainland markets last week and raised questions over the viability of government efforts to prop up share prices as the economy slows. China’s industrial profits fell 0.3% in June from a year earlier, the statistics bureau reported on Monday. The International Monetary Fund has urged China to eventually unwind its support measures, according to a person familiar with the matter.
“Investors are afraid the Chinese government will withdraw supporting measures from the market,” said Sam Chi Yung, a strategist at Delta Asia Securities in Hong Kong. “Once those disappear, the market cannot support itself.”
The Shanghai gauge had rebounded 16 % from its July 8 low through Friday as officials went to extreme lengths to halt a rout that erased $4 trillion from the nation’s equities.
Officials allowed more than 1,400 companies to halt trading, banned major shareholders from selling stakes and armed a state-run financing vehicle with more than $480 billion to support the market.
A measure of 30-day volatility in the Shanghai Composite jumped to its highest level since 1997, as more than 1,700 stocks fell by the daily 10 % limit on the Shanghai and Shenzhen exchanges. The Hang Seng China Enterprises Index sank 3.8%, extending the world’s worst decline in the past month. The Hang Seng Index fell 3.1 %.
Brokerages led declines in Hong Kong, with Citic Securities and Haitong Securities tumbling more than 9 %. China’s overnight money market rate climbed to the highest level since early May amid rising demand for funds as the end of the month approaches.
A gauge of industrial companies plunged by a record 9%, the most among the 10 groups on China’s large-cap CSI 300 Index, which sank 8.6 %. The slump in industrial profits last month compared with a 0.6 % gain in May, according to data from the statistics bureau. For the first six months, earnings slid 0.7 %.
June’s equity market slump was very likely a contributor to the fall in industrial profits, according to Bloomberg Intelligence economists Tom Orlik and Fielding Chen. Chinese firms are major investors in the stock market. Back in May, when the National Bureau of Statistics was reporting rebounding profits, they acknowledged that investment gains were a big contributor.
Data on Friday showed a private gauge of Chinese manufacturing unexpectedly fell in July to the lowest level in 15 months. Monday’s drop by the Shanghai Composite was the biggest since February 27, 2007, when the gauge tumbled 8.8 % as the government cracked down on the use of borrowed money to buy stocks. Prior to that, the last time the index fell so much was on February 18, 1997, when the index plunged 8.9 % amid concern about Deng Xiaoping’s health. China’s paramount leader died the following day.
The IMF has told the Chinese government that while interventions in general are appropriate to prevent major disorder, prices should be allowed to settle through market forces, said a person familiar with IMF discussions on the issue and who asked not to be identified because the talks are private. Chinese officials assured the lender that the measures should be considered temporary, the person said last week.
“Today’s rout in China poured cold water on investor sentiment,” said Mari Oshidari, a Hong Kong-based strategist at Okasan Securities Group. “This also revealed the market is still too fragile without government support.”
With inputs from Bloomberg