Stocks slide as US jobs report plays on investors’ minds

Indian stocks plunged on Friday, as nervous investors took money off the table before the release of tepid US jobs data for August. The US Federal Reserve is expected to rely on key hiring data to decide the quantum of rate cuts in the world's largest economy later this month.

Breaking a three-week winning streak, the Sensex and Nifty fell 1.2%, the most in a month, closing at 24,852.15 and 81,183.93 points respectively. The losses were led by index heavyweights Reliance Industries, State Bank of India, ICICI Bank and Infosys.

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Traders remained on the edge, especially since last month's weak payroll figures had rocked equities worldwide, though followed by a swift rebound. Experts said markets were already in an overbought zone and hence due for a correction.

"Such declines are always a possibility in such a raging bull market," said Varun Saboo, head of equities at Anand Rathi Shares & Stock Brokers. He viewed Friday's fall as a passing one, where investors chose to be safe ahead of key data. As a result, they are cautiously reducing their positions before the data release, he said.

Fear gauge surge

The nervousness was evident in the 6.5% surge in fear gauge India VIX.

Andrew Holland, CEO of Avendus Capital Alternate Strategies said Friday's dip was mainly driven by global factors, with investors taking profits ahead of key events. “All attention is on the US Federal Reserve’s policy decision and chairman Jerome Powell's comments, as investors hope the central bank stays ahead of the curve before the economy slows significantly,” he said.

With that in mind, investors are now focusing on the Reserve Bank of India’s October meeting, where the central bank is expected to keep interest rates unchanged, Holland said.

According to Holland, the market is running ahead of fundamentals, with weak June quarter earnings and multiple downgrades. Additionally, both public and private capex remain sluggish, and high valuations leave few catalysts for further growth. However, he noted that strong liquidity has sustained market momentum.

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Sections of the market also worry that the regulator may tighten rules governing derivatives, raising entry barriers and making trading more costly to limit retail speculation on risky contracts. Additionally, the regulator may also revisit earlier proposals to increase margin requirements and monitor intraday trading positions.

Said Gaurav Dua, senior vice-president & head of capital market strategy at Sharekhan by BNP Paribas, “Equity markets globally have been under pressure for the past few days, even though Indian market has been outperforming. That said, the correction today is more of a catch-up with the global market scenario”. Besides, he believes foreign institutional outflows and negative domestic news flow to be a trigger for today’s decline.

“It would not be surprising if markets take a breather with correction both in terms of price and time. However, the pain could be enhanced in the broader market with a sharp cut in momentum and speculative stocks,” Dua added.

Small-cap fall

The Nifty Smallcap 250 closed 1% lower at 18,307.85 points and Nifty Midcap 100 fell 1.6% to 58,501.95 points, though the former hit an intraday record high at 18627.45 before falling.

As per a report by ICICI Securities dated 3 September, “Mid and small caps continue to be at their ‘most unattractive’ relative valuation to large caps although near-term growth prospects appear higher than in large caps”.

Saboo of Anand Rathi is optimistic about financials, particularly banks and non-banking finance companies, expecting the rate cut cycle to start soon. He is also bullish on the cement sector, and believes volume growth is on the rise, coupled with sustained attempts by companies to raise prices.

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A Berstein’s Research report dated 29 August said, “A surprising election result and weak US labor data were only dampeners for a brief period, signalling that every 1-2% fall is seen as a buying opportunity now”. In this scenario, only a significant fundamental shift in stocks or a firmly established macro event can trigger a sustained adverse reaction. And there is scope for such events in the coming months, making bottom-up stock picking seem more relevant and skilful, said analysts at Bernstein.