Markets wobble on US downgrade

The markets had a turbulent session of trade as the downgrading of US credit rating from AAA rating to AA+ send shockwaves across the global markets. The Sensex broke the 17k mark to end at 16,990, lower by 315 points and the Nifty ended at 5118, down 92 points. The broader markets did no better, with the midcap index shedding 1.5% at 6488 and the smallcap index shedding 2.2% at 7641. All the BSE sectoral indices ended in the red, with realty, IT and metals doing the bulk of the damage.

Markets were staring down the barrel at opening bell. There was panic selling across the markets that were open for trading on Sunday. Israel's Tel Aviv stock exchange dropped 7% and Egyptian stocks had plunged more than 4% in what appeared to be a knee-jerk reaction to the happenings in the US. And Asia was also had a shaky start, with the likes of Hang Seng, Nikkei and Shanghai tumbling anywhere between 2% and 5% each and South Korea slumping as much as 7% at one point.

As expected, the benchmark indices had a gap-down opening and touched 14-month lows in the early part of trade. Therafter, the markets were on the edge through the day. The BSE benchmark yo-yoed in a broad range of more than 500 points and the VIX index spiked to 12-month highs in the region of around 30, which only betrayed the extent of fear and panic that has gripped the markets. The Sensex did recover more than 200 points from the day's lows, but this would still not have been good enough to soothe many a frayed nerves back home, already on the edge after Friday's 300+ plunge.

It all started with the credit agency, Standard & Poor's downgrading the United States' AAA credit rating, held since 1941, by a notch to AA+ late Friday, followed by a weekend warning that further downgrades could come if Washington remains mired in political gridlock over solving its long-term debt woes. It needs mention that the rating competitor Moody's has not followed suit, but still repeated a warning that it could cut the US rating before 2013 if the fiscal or economic outlook weakens significantly.

The lurking fears of a worsening crisis in Europe only exacerbated the jitters. The yields on Italian and Spanish debt soared to 14-year highs last week on political wrangling and doubts over budget cuts, raising fears that the euro zone's bailout fund could be under pressure. The ECB's plans to intervene in the Italian and Spanish debt markets to reduce borrowing costs did manage to arrest the downfall across European markets, but the relief seemed only momentary. As while the FTSE, CAC and DAX began their proceedings on a relatively stable note, they did cave in to selling pressure and had shaved off between 1% and 2% midway through the session.

All eyes are glued on the Federal Reserve's policy meet on Tuesday to see whether it would initiate any steps to bail out the beleaguered US economy, which has already seen two quantitative easing packages worth $600 billion thus far. The Dow futures are down more than 200 points as they stare at their first trading session after the unsettling developments over the weekend.  

DLF nosedived by 6.8% at Rs 195 to emerge as the largest loser on the BSE. IT stocks crumbled throughout this session as the US rating downgrade may lead to a slowdown in technology spending by clients in the world's largest outsourcing market. Infosys and Wipro lost in the region of 3% each to hit 52-week lows of Rs 2468 and Rs 358 respectively, while TCS was down 4.4% at Rs 1009. Metal shares also witnessed a meltdown, with Hindalco weakening by 6.8% at Rs 151, Tata Steel shedding 4.1% at Rs 510 and Jindal Steel losing 32.3% at Rs 523. And index heavyweight RIL lost 1.4% at Rs 780.

On the other hand, most auto stocks rebounded into the green. Hero Honda raced ahead by 4% at Rs 1855, M&M added 1.6% at Rs 666 after its Q1 net profit rose 8% to Rs 604 crore and Bajaj Auto added 0.8% at Rs 1412. ONGC rose 2.3% at Rs 282 on reports that it was in talks with BG, Eni and Shell to sell stakes in deepwater developments off the country's resource-rich eastern coast.

Among the other stocks in the news, RCom tanked by 4.4% at Rs 87 and R-Infra dived by 5.9% at Rs 492 on being excluded from the Bombay Stock Exchange (BSE) 30-share index Sensex from today. On the other hand, the new entrants, Coal India and Sun Pharma have ended flat at Rs 392 and Rs 497 respectively.

The market breadth was abysmal. Out of 2,942 stocks traded on the BSE, there were 661 advancing stocks as against 2,199 declines.