Mayhem on St after Fed signals QE pullback

The US Federal Reserve’s announcement that it could start tapering bond purchases towards the end of this year and then completely by mid-2014 sent Indian markets on a free fall on Thursday, as it did most others.

The benchmark Sensex tanked 526.41 points, or 2.74%, to close at 18719.29,while the Nifty closed 166.35 points down at 5655.90.

It was the biggest single-day drop since September 22, 2011, when the Sensex had lost 704 points, or 4.13%, even as the Dow Jones Index lost 2.49%.

Interestingly, even that crash was caused by the Fed, after it came out with a gloomy outlook on the US economy.

On Thursday, the Fed statement caused foreign institutional investors (FIIs) to dump equities heavily in the cash segment, with 48 out of 50 stocks listed on the Nifty ending deep in the red.

FIIs sold equities worth Rs 2,094.06 crore (as per provisional exchange data) after having been net sellers by Rs 3,855 crore over the past seven trading sessions.

That also makes it the longest selling streak by FIIs since December 2011.

V K Sharma, head of private broking and wealth management, HDFC Securities, believes the Fed move will weigh on the markets for a while. “The kind of FII selling witnessed was largely expected as they have been selling into debt markets and was net sellers in equities as well. The current risk-off trade environment may lead to more fall in the markets in days to come.”

Sharma believes the sell-off in equities may get accentuated if the currency weakens further due to further debt outflows.

The rupee on Thursday touched an all-time intraday low of 59.98.

Other global markets too fell sharply. While Asian markets closed the day down 2-3%, the major European indices were trading down nearly 3%.

Neal Soss and Dana Saporta, economists at Credit Suisse, believe shallow financial markets will amplify any Fed tapering.

Sharma, too, sees a sell-off in the US markets if the leveraged positions – at an all-time high – on the NYSE get triggered if the US bond yields keep rising.