Key Factors Contributing to Nifty's Drop Below 19,000

Indian stock market in a bearish trend on October 26, with benchmark indices declining for the sixth consecutive session, marking the most extended losing streak since February 28, 2023. BSE Sensex dropped by over 700 points or 1%, and NSE Nifty 50 fell below 19,000 for the first time in 81 days, primarily due to concerns related to inflation and a possible recession.

Global equity markets are currently experiencing a risk-off sentiment, driven by a combination of economic and geopolitical factors. The ongoing Israel-Hamas conflict remains a challenge for markets, and if it persists, it could potentially impact global economic growth, particularly at a time when the global economy is already slowing down.

In the short run, the strongest challenge facing the market is high US bond yields. 10-year bond yield is approaching 5%, it's probable that Foreign Portfolio Investors (FPIs) will adopt a 'sell' stance. This could exert pressure on sectors like banking and IT, which make up a substantial portion of FPI assets under management (AUM). This situation presents a chance for long-term investors to acquire high-quality stocks, especially in the banking sector, at attractive rates.

Factors Behind the Market Downturn

The recent decline in the Indian stock market over the past five sessions can be attributed to the rising US Treasury yields, which is a concern affecting global equity markets worldwide. 10-year US Treasury yield had previously reached a 16-year high but had recently dropped below 5%. However, investors are now showing interest in rebuying US bonds, which has led to profit booking in the Indian stock market. This sudden change in investor behavior is why the Indian stock market started falling after initially opening with gains.

Israel-Hamas war

ongoing tension in the Middle East has caused uncertainty. This uncertainty is affecting global stock market investors, including in India's Dalal Street.

Rising US dollar

The US dollar has strengthened, as the US dollar index went back above the crucial 106 level after briefly dropping. This resurgence of the US dollar has led to profit-taking in the Indian stock market.

Rising inflation

This increase in oil prices could lead to higher inflation in India. It's because India depends on imports for about 85% of its crude oil needs. So, if oil prices keep going up because of tensions in the Middle East, it could pose a danger to India's inflation rate and overall economy.

FIIs' selling

Foreign investors (FIIs) have been selling Indian stocks because the US dollar has been getting stronger, they often move their money from emerging markets like India to other assets like gold, bonds, or different currencies.

Weak Q2 results 2023

In the second quarter of 2023, major companies like DMart, TCS, Infosys, and others reported disappointing financial results. While ICICI Bank and Kotak Mahindra Bank posted strong Q2 results. However, investors didn't seem as enthusiastic about the good results from these banks compared to their reactions during the first quarter of 2023 suggesting investors may not have been as impressed by the Q2 results as they were with the Q1 results.

Market Outlook

Current market is in correction mode, mainly influenced by global factors. This correction is visible across different asset classes in most markets, reflecting concerns about disruptions in the supply side and the ongoing high inflation.

Market trends are ahead of the US Federal Reserve, with expectations of a potential economic slowdown and the possibility of a looming recession in the US. On October 26, all NSE sectoral indices were in the red, with Nifty Media and Nifty Realty leading the losses, both falling over 2%. Nifty FMCG, Nifty IT, Nifty Metal, Nifty Pharma, Nifty PSU Bank, and Nifty Auto indices also declined in the range of 1% to 1.8%. Foreign Institutional Investors (FIIs) have been selling in October. Nifty's major support level is at 18,850.