Sensex slumps 1,500 points in two days; here's what has spooked investors

Stock market closing: After a sharp run-up of around 17 per cent from June lows, markets have succumbed to profit booking as investors around the world become cautious.

Over the last two days, domestic equity markets have sharply treaded lower as renewed fears of stringent rate hikes took over Dalal Street. 

After a sharp runup of around 17 per cent from June lows, markets have succumbed to profit booking as investors around the world become cautious. Since Friday, the BSE Sensex, and the NSE Nifty indices have shed 1,524 points and 465 points, respectively. 

"Consolidation was triggered in the market in anticipation of tighter monetary policy by the Fed and worries over a slowdown in global economic activity. The current risk reward is not favouring investors. Rising dollar index and higher US10 year bond yield act as the near-term headwinds for the market", said Vinod Nair, Head of Research at Geojit Financial Services.

Here are some factors that have swayed the market mood: 

FOMC minutes: The minutes of the US Fed’s latest meeting revealed last week that the central bank believes inflation is too high despite aggressive rate hikes, and that there was little evidence to support that inflationary pressures were subsiding. This has raised bets that the Fed will continue with its rigid tightening at least for some time. 

Moreover, several Fed officials lent support to potential more big rate increases on Thursday, as per reports. For instance, St. Louis Fed President James Bullard and San Francisco Fed President Mary Daly have batted for raising interest rates by 50-75 basis points in September. Hence, market confidence has taken a blow as investors await Fed Chair Jerome Powell's address at the Jackson Hole symposium on Friday. 

Slowdown fears: As a result of the hawkish Fed, risk aversion has set among investors. US markets snapped their 4-week rally on Friday with the frontline indices tanking up to 2 per cent. 

Besides, a slowdown in neighbouring country China has also soured sentiment. The country’s GDP in Q2 came in at just 0.4 per cent on-year, its slowest rate since the Covid crisis began in 2020. Subsequently, the country’s central bank on Monday cut benchmark loan rates in an attempt to boost the economy. 

Rupee slump: The US dollar has also been gaining strength recently amid rising expectations of higher rate hikes. The dollar index hit a fresh five-week high of 108.26 on Monday as investors turned apprehensive. Rupee also pulled back to 79.86/$ levels. Similarly, the 10-year US treasury yield touched the 3 per cent mark for the first time in a month.

F&O expiry on Thursday: Equity markets were also pressured on Monday as the monthly F&O expiry draws near. After a sharp run up the markets since July and the corporate earnings season now getting over back home, investors will look to global cues as they roll over their July positions to the next series.