Mumbai: In a clear sign of the global nature of markets turmoil, the Bombay Stock Exchange’s (BSE) benchmark Sensex swung violently, reacting to every twist and turn overseas, falling by 529 points just before noon, then recovering about 537 points before ending the day at 14,141.52, down 216.7 points or 1.51%.
The difference between the Sensex’s high and low on Friday was a staggering 538.7 points. The broader Nifty index of the National Stock Exchange (NSE) ended the daywith losses of 70.5 at 4,108.05, down 1.69%.
And, perhaps setting the stage for another volatile day on Monday, after all Asian markets closed Friday, the US Federal Reserve announced a surprising cut in the discount rate by 50 basis points, from 6.25% to 5.75%.
In late-afternoon trading, equities rallied strongly in European markets and at 10pm IST, the Dow Jones Industrial Average was up 141.62 points to about 12,987.40.
Says Prateek Agarwal, head of equities at ABN Amro Asset Management at Mumbai: “The Fed’s announcement is a very positive move for the market. The Indian market, along with all other Asian markets, are likely to open at sharply higher levels on Monday as a result.”
Earlier in India, foreign institutional investors (FIIs) continued their selling spree, with net sales of Rs3,535.76 crore of Indian equities, adding to Thursday’s net sales of Rs3,108 crore. Friday’s net sales were a new record for sales pressed by FIIs on a single day. Indian institutional investors, on the other hand, were net buyers of Rs1,944.4 crore in equities.
That selling and buying came as all the Asian markets turned very volatile, witnessing sharp falls earlier in the day and then recouping the losses later in the evening. Hong Kong’s Hang Seng index recovered about 1,000 points from the day’s low of 19,386 to close at 20,387.13, down 1.38%. South Korea’s Kospi, too, recovered from the day’s low of 1,626 to end the day at above 1638, down 3.19%.
However, the Japanese market was a stark exception. The Nikkei ended the day down 225 points, or 5.4%, to15,273.6, a notch above its day’s low. Indonesia’s Jakarta Composite was the other Asian index to end with more than 5% loss.
During the day, Asian markets danced to the yen’s tune, rising and falling inversely to the Japanese currency. Analysts interviewed by Mint said the sharp fall in Asian indices in the morning was triggered by a further rise in the value of yen. The yen climbed to 111.61 against the US dollar in the morning, leading to panic selling in equities, as carry trades were unwound.
Carry trades are the result of speculators borrowing in currencies with low interest rates, such as the yen, and using the funds to invest in high-yield markets. When the yen rises, the yield from the carry trade reduces, forcing investors to reverse the trade. Later Friday, the yen stabilized at around 114, which led to Asian equities bouncing back. Also, analysts noted that most traders did not want to carry forward their positions over the weekend, which led to the drop in the Sensex later in the evening.
Lalit Thakkar, director of research at Mumbai-based Angel Broking Ltd, says that the recovery in the indices had more to do with the short covering of positions in the derivative market than genuine buying from any parties.
“Deliveries in the market were low. This shows that there are very few investors in the market. But trader participation in today’s market was quite high compared to previous days,” he says.
The cash volumes at BSE went up significantly to Rs6,800 crore against Rs5,600 crore on Thursday’s trade. “The total volume on Friday, including that in cash markets at both BSE and NSE and in the futures and options market, was about Rs86,000 crore. This is higher than what we witnessed over the last fortnight. The heightened action in the market (on Friday) could have increased the volume. Heightened volatility in the market automatically induces higher trade volumes,” Thakker said.
Many traders have leveraged positions in the single stock futures, notes Sunil Jain, an analyst at Mumbai-based Edelweiss Securities Pvt. Ltd. Margin pressures on these long positions in the derivative market had also triggered today’s intra-day fall, he added.
Investors, usually buy stock futures by paying a certain margin amount instead of the full price. If the stocks fall sharply as has been the case in recent times, the margin amount to be paid increases. As a result, investors end up being forced to sell the stocks.
But there was also some amount of buying.
D.K. Mehrotra, managing director, Life Insurance Corp. of India (LIC), one of the largest domestic institutional investors in the market, thinks that the market provides a buying opportunity. LIC has been buying at these levels, he said, while refusing to confirm market speculation that it bought equities worth more than Rs1,000 crore last week.
George Thomas, a trader registered with Motilal Oswal Securities Ltd, confirmed that many fellow traders had taken positions in single stock futures: “Some booked profit on select Sensex stocks, which made some gains today. However, most of them are holding on to mounting losses.”
There is a clear change in the psyche of Indian investors, who are increasingly accepting volatility as an inherent part of stock market investing, notes Sivasubramanian K.N., senior portfolio manager of equity at Franklin Templeton in India. “We have not witnessed any increase in redemptionsduring the recent volatility”he says.
Meanwhile, the rupee staged a strong comback after nearly touching a four-month low, and ended stronger at 41.3250/3350 against the dollar, drawing support from the late recovery in equity markets.
(Rachna Monga and Ashwin Ramarathinam of Mint, and PTI contributed to this story.)