Omicron, US Fed's hawkish tone drags indices down by more than 1%

Fresh concerns around the spread of Omicron and Fed's hawkish tone pulled the markets down on Friday.

The benchmark Sensex ended the session at 57,696, a decline of 765 points or 1.3 per cent. The Nifty on the other hand, ended the session at 17,196, a fall of 205 points or 1.2 per cent.

The indices, however, managed to finish the week a one per cent gain—their first in three weeks.

The indices had gained through the week on the back of a bunch of positive economic data. However, Friday’s selloff indicates that the market was still not out of the woods despite a sharp correction from its record highs amid the uncertainty caused by the new coronavirus-variant.

Experts said the mood turned sombre after first Omicron cases were reported on Thursday from Karnataka. The new variant has spread to over 25 countries, and initially, reports suggest that it is highly infectious. According to a South African study of infections since the pandemic, the risk of reinfection from the omicron variant is three times higher than the previous strains.

"News from Omicron will drive the markets. If the Omicron cases rise, that could be one data point that could change sentiment. So far, what was factored was that the variant is not serious, and spread is controllable," said UR Bhat, co-founder Alphaniti Fintech.

The hawkish tilt Federal Reserve's views on inflation also weighed investors' minds, and raised concerns that the Fed could accelerate the tapering of its bond-buying programme, and an interest rate hike could be sooner than expected. Fed officials this week explained the rationale for tapering bond purchases this week, reinforcing Fed Chief Jerome Powell's hawkish tone. Earlier this week, Jerome Powell said officials should consider removing pandemic support faster and retired the word "transitory" to describe inflation. Powell's comments were made before a Senate Committee where lawmakers from both sides of the aisle expressed concerns about the raging inflation.

"We see a roller coaster ride in markets across the globe due to the news flow around the new COVID variant, and we don't expect any relief soon. Participants have no option but to align their position accordingly and prefer hedged positions. Investors should not worry much about these fluctuations and use the further dip to add quality stocks in a staggered manner," said Ajit Mishra,VP- research, Religare Broking.

The data on US jobless claims remained low, suggesting progress in the job market. Analysts said the payroll numbers on Friday would give further clarity on Fed tapering. Concerns about the Fed's less than generous monetary support and the fallout of Omicron spread have led to aggressive selling by foreign portfolio investors. So far this month, they have sold equities worth Rs 8,300 crore in the secondary market.

"Going ahead, market volatility is likely to continue given the uncertainty around the new Omicron variant and Fed tapering. Until the clarity doesn't emerge over its transmission rate, hospitalisation needs, etc, news flows around it would keep markets unpredictable. However, the correction has made valuations comfortable. Given the robust long term fundamentals, investors are recommended to indulge in value buying from time to time,' said Siddhartha Khemka, Head-Retail Research, Motilal Oswal Financial Services.

Reliance Industries fell 3 per cent and contributed most to the Sensex decline. Barring four, all Sensex stocks declined. The market breadth was positive, with 1,765 stocks gaining and 1,500 declining on BSE.