5 factors that spooked global equity markets on Monday

Here are 5 reasons that contributed to the fall in markets across the globe

Global equity markets slumped on Monday with most indices across Asia slipping 1% - 3%. Back home, the S&P BSE Sensex and the Nifty 50 indices also made a weak start to the new week by slipping over 1% each in early trade. While the S&P BSE Sensex lost nearly 300 points to 26,340 levels in morning deals, the Nifty 50 index shed around 80 points to slip below the 8100 mark.

Here are 5 reasons that have contributed to the fall:

MSCI inclusion of China A shares in emerging market indices: Morgan Stanley Capital International (MSCI), a leading provider of global stock indices, is expected to announce its decision to include mainland China-traded shares, or China A-shares, to its emerging market (EM) index, at its annual review on June 15. Though the chances of inclusion of the yuan-based index are slim, reports suggest the inclusion could see billions of dollars flow into the Chinese stock markets from across the globe. 

 

 

Outcome of US Federal Reserve (US Fed) meeting: Market participants are also eyeing the outcome of the US Fed meeting on the road ahead for key rates. The central bank’s two-day meet will conclude on June 15. Last Friday, the US economy failed its third and final test for a June rate hike when it became clear that employment growth had slowed down considerably and questions about the momentum of the economy were raised.

Given this, analysts remain sceptical of a possible rate hike in the June meeting, and are keenly awaiting the US Fed’s observation on the health of the economy.

"We stick to our call for two hikes this year, but we now expect the first to take place in September instead of June. While we still see a distinct possibility for a July hike, we now believe that this is less likely than September. Finally, we still see a second hike in December," points out Philip Marey, a senior US strategist at Rabobank International.

Brexit vote: Given that opinion polls continue to indicate that the result of the United Kingdom's June 23 referendum on European Union (EU) membership could go either way, it is not surprising that levels of anxiety have soared.

In a recent interview to Business Standard, Jyotivardhan Jaipuria, founder & managing director of Veda Investment Managers suggested that Brexit is a bigger threat for the market. An actual Brexit, he says, could lead to a sharp correction, though the market is still treating it as a low probability event.

"The Brexit polls remain very close and indeed have got closer in the past two weeks in what GREED & fear views in an understandable reaction to the overdose of scaremongering tactics indulged in by the “Remain” campaign. The risks of an “Out” vote are growing, even though “Out” is still not GREED & fear’s base case," said Christopher Wood, managing director & equity strategist at CLSA in a recent note.

"A British vote to leave the EU would be extremely bearish for the euro. GREED & fear would advise macro speculators on such an “Out” vote to buy sterling on the likely initial sell-off and short the euro. This is because if Britain votes out it will set off a popular demand in other EU countries for similar referenda to be held. This will be particularly destabilising if such countries are members of the euro," he adds.

Rally in oil prices: What has also causing worry are the rising oil prices, which have nearly doubled from their calendar year 2016 (CY16) lows. A rally in oil prices has the potential to trigger inflation and dent the fiscal situation as the government tries to dole out more subsidies to soothe impact. 

If experts are to be believed, oil prices still have more headroom and are likely to settle around teb $60 per barrel mark. 

"The inflection phase of the oil market continues to deliver its share of surprises, with low prices driving disruptions in Nigeria, higher output in Iran and better demand. With each of these shifts significant in magnitude, the oil market has gone from nearing storage saturation to being in deficit much earlier than we expected and we are pulling forward our price forecast, with 2Q/2H16 WTI now $45/bbl and $50/bbl," points out a May 2016 report from Goldman Sachs.

"We believe that the industry still has further to adjust and our updated forecast maintains the same 2016-2017 price level that we previously believed was required to finally correct both the barrel and capital imbalances, and eventually take prices to $60/bbl," it adds.

Profit booking: Given these developments, analysts remain sceptical and are advising investors to book profits at regular intervals. From a level of around 6,800 in March, the Nifty had gained nearly 1,400 points, or 21%, to cross the 8200 levels last week. Global brokerages like Goldman Sachs and Bank of America-Merrill Lynch (BofAML) have turned bearish on global equities and are preferring to remain in cash. Though they believe that India will not remain insulated from these global events, it however, remains an attractive investment destination in the overall emerging market context.