Sensex Crashes Over 1,000 Points On Policy Pain From Global Central Banks

There was mayhem in Indian stocks early on Monday as US Fed Chair’s aggressive monetary policy stance spooks global financial markets.

The bloodbath in domestic equity benchmarks was also because global stocks extended their slide, weighed down by fear that aggressive rate hikes around the world will put the brakes on economic growth.

The 30-share BSE Sensex index crashed by 1,153 points, or 1.96 per cent, to 57,680.87 and the broader NSE Nifty 50-index slumped 337 points, or 1.92 per cent at 17,221.40.

All Nifty 50 traded deeply in the red, National Stock Exchange data showed. Rate sensitive realty index was down 2.8 per cent, while the IT index slumped 4.4 per cent.

Domestic equity bourses closed out with marginal gains on Friday, but ended last week with losses on rising global recession fears after poor economic data from Asia to Europe and Americas.

The Sensex index closed out Friday with marginal gains of 59.15 points to end at 58, 833.87, and the Nifty edged up 36.45 points to 17,558.90.

On Monday, Asian markets fell as bond rates and the dollar rose substantially and valuations for stocks and earnings were put to the test by the growing possibility of more drastic rate increases in the United States and Europe.

“…the entire Asian pack is trading in deep red after US Fed chairman Jerome Powell in his speech on Friday indicated that interest rates may continue to rise to keep inflation in check. Powell stated that failure to restore price stability would mean far greater pain,” said Prashanth Tapse, Senior VP for Research at Mehta Equities.

A global share index fell to a one-month low as Asian equities shed over 2 per cent, hurt by tech firms. Losses on Nasdaq 100 and European futures were at least 1 per cent, according to Bloomberg.

Hopes that the central bank will come to the rescue of the markets as frequently as in the past were dashed by Federal Reserve Chair Jerome Powell’s threat of inflicting “pain” on the economy to curb inflation, sinking stocks and equity futures and lifting two-year Treasury yields to levels last seen in 2007.

“The main takeaways are taming inflation is job number one for the Fed and the Funds Rate needs to get to a restrictive level of 3.5 per cent to 4.0 per cent,” Jason England, global bonds portfolio manager at Janus Henderson Investors, told Reuters.

“The rate will need to stay higher until inflation is brought down to their 2 per cent target, thus rate cuts priced into the market for next year are premature.”

The hawkish message was not what Wall Street wanted to hear and S&P 500 futures fell another 1.1 per cent after falling over 3.4 per cent on Friday, with tech stocks under pressure from the prospect of slower economic growth, Nasdaq futures declined 1.5 per cent.

The largest MSCI index of Asia-Pacific stocks outside of Japan fell as much as 2.3 per cent, the most since June 13, with technology and industrials the worst-performing sectors. South Korea lost 2.3 per cent while the Nikkei in Japan fell by 2.8 per cent.

“Key to whether Asia will suffer more substantially will depend crucially on the direction of the dollar,” Gary Dugan, chief executive at the Global CIO Office in Singapore, told Bloomberg. “Our quant model is giving a near-term sell signal on the equity markets.”

The region’s equities have faced selling pressure this year amid rising global interest rates and the impact of China’s COVID-19 lockdowns.

Monday’s loss extends the Asian stock benchmark’s year-to-date decline to more than 18 per cent, trailing US and European peers.

Isabel Schnabel, a member of the ECB board, delivered a tough love message over the weekend, warning that central banks must now act decisively to combat inflation, even if doing so sends their economy into recession.

Following the ECB’s rate warnings, the EUROSTOXX 50 futures fell 1.7 per cent and Chinese blue chips fell 0.6 per cent.

As markets priced in a potential economic slump, the aggressive central bank chorus increased short-term yields internationally while further inverting the US Treasury curve.

Indeed, bonds sold off and a deepening inversion of the Treasury yield curve underscored expectations of a recession as monetary policy tightens.

The dollar index scaled to a fresh two-decade peak of 109.4 in early Asia trade, with greenback strength pushing other major currencies to new lows and putting pressure on its emerging markets counterparts.

Still, crude oil prices climbed as expectations OPEC will cut output if needed to support prices, conflict in Libya, and rising demand amid soaring natural gas prices in Europe helped offset a dire outlook for growth in the United States.

US West Texas Intermediate (WTI) crude futures jumped $1.09, or 1.2 per cent, to $94.15 a barrel at 0241 GMT, adding to a 2.5% gain last week.

Brent crude futures rose 89 cents, or 0.9 per cent, to $101.88 a barrel, extending a 4.4 per cent gain last week.

“Oil prices were stronger amidst the ongoing pressure on fuel demand from Europe’s energy crisis, and supply constraints,” National Australia Bank commodities analysts said in a note.

Heavy clashes in Libya’s capital which killed 32 people on the weekend sparked concern that the country could slide into a full-blown conflict, which could again disrupt crude supply from the OPEC nation, they said.

Prior to Friday’s hawkish remarks from Federal Reserve Chairman Jerome Powell that the United States faced a protracted period of weak growth amid more rate hikes, both crude benchmark contracts had traded lower. The dollar had risen as a result.

“While a strong dollar restrains broad commodity prices, the undersupply issue in the oil markets will probably continue to support the upside bias,” CMC Markets analyst Tina Teng, told Reuters.