Bears gripped Dalal Street on Friday as benchmark indices edged lower heading a negative close for the third straight day. Nifty tumbled 132.70 points or 0.75% at 17,859.45 while Sensex settled at 59,900, down 450 points. Both indices ended the first week of 2023 nearly 1.5% lower. Most of the major sectoral indices logged losses. Twenty-five of the Nifty 50 constituents fell, with IT stocks declining 2% on Friday ahead of the third quarter earnings season, set to begin on Monday. The weakness in the market comes after US data indicated the US Federal Reserve will keep hiking interest rates to reign in inflation. Apart from this, consistent selling by foreign investors, volatility in global markets and a spike in crude oil prices also dampened investors’ sentiments.
Nifty, Sensex crash on Friday, what spooked Dalal Street bulls?
Nifty valuation expensive, FII selling persists
With Nifty 50 trading above its long-term average PE multiple, valuations in India have turned undoubtedly challenging, according to Christopher Wood, global head of equity strategy at Jefferies. “If Asia looks better in aggregate on comparative valuations, there is one market where valuations are undoubtedly challenging. That is GREED & fear’s long-term favourite, India. The Nifty index now trades at 18.8x 12-month forward earnings, compared with a historic 10-year average of 17.2x,” Wood said in his weekly note.
According to VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, the major drag on the market now is the sustained selling by FIIs. “FIIs sold for the 10th consecutive day yesterday taking the cumulative selling to Rs 11,400 crore. The underperformers of last year like China and Europe are doing well. Clearly, FII money is chasing lower valuations by selling in overvalued markets like India. This trend might continue imparting weakness in the Indian market,” he said.
Nifty technical chart shows weakness
“Technically, for Nifty the immediate aggressive downside risk is seen at 17,771 mark and then aggressive targets at 17,461 mark. The index will gain strength only if it closes above its high of 18,267 mark,” Prashanth Tapse, Senior VP (Research) at Mehta Equities said.
Weakness global markets spill over to India
European markets were cautious ahead of key inflation data for the Eurozone, which is expected to show a further slowdown in consumer price increases. In afternoon trade, Contracts for the Euro Stoxx 50 and S&P 500 gained. In the Asia-Pacific region, shares in Japan, South Korea, and Australia gained, while stocks in China and Hong Kong traded volatile after initially rallying on news reports of Chinese officials removing restrictions on property developer borrowing. Overnight in the US, Wall Street’s main indexes lost more than 1%, with Nasdaq leading the declines. The Dow Jones Industrial Average fell 1.02%, S&P 500 lost 1.16%, and the Nasdaq Composite dropped 1.47%.
Dollar strength dampens investor sentiments
The US dollar rose in early trade on Friday. The American currency was trading near a one-month high after healthy employment data pointed to a strong labor market ahead of the widely-watched official jobs report. The Dollar Index, which tracks the greenback against a basket of six other currencies, rose 0.2% to 105.075, not far off Thursday’s near one-month peak of 105.27. “The US dollar rallied by 0.84% yesterday after U.S. ADP non-farm employment data showed more than expected number of jobs were added in the economy. Strong labour market data supported prospects that Fed may keep rates higher for some time,” said ICICI Securities.
Crude Oil prices rebound
Crude Oil prices rose around 1% on Friday, extending gains from the previous trading session after data showed lower fuel inventories following a winter storm that hit the United States at the year end. Brent crude futures last gained 79 cents, or 1%, to $79.48 a barrel. US West Texas Intermediate crude futures were also up 80 cents, or 1.1%, at $74.47 a barrel. Oil prices are likely to end this week with a more moderate decline than expected at the start of the week, as optimism about Chinese demand reignited, pushing prices higher. The upward movement in crude oil prices does not bode well for India, which is a net importer of crude oil.