Are the markets prepared for deeper cuts in the future?

Dalal Street witnessed another bloodshed on Thursday as weak earnings at Wall Street-listed retailers sounded alarm bells regarding consumer demand.

The BSE Sensex crashed 1,416 points to drop below the 53,000 mark, while the Nifty50 gave up more than 300 points to drop below the 15,900 mark.

So far in calendar year 2022, the blue chip indices (S&P BSE Sensex and Nifty50) have lost more than 10% each, while the broader markets are down as much as 21%.

The sale comes in the wake of monetary tightening by global central banks walking a tightrope to control inflation and allow growth to flourish.

Rising oil prices and lower earnings are expected to keep market sentiment subdued in the near term.

That said, what has made the correction worse is relentless selling by foreign portfolio investors for eight straight months.

Since October last year, FPIs have sold shares worth almost Rs 2 trillion and in 4 out of the eight months more than Rs 30 billion each were sold.

And even though retail investors and domestic institutional investors are fueling the market, FPIs are having the upper hand.

So what are FPIs worried about and when will this sell-off taper off?

Nischal Maheshwari, managing director of institutional equities at Centrum Broking, says rising inflation and shrinking balance sheets are scaring the markets. Exit from easy money policy by stoking inflationary pressures, he says. Money going back to the US; 10-year yields at 3%.

He says FII’s daily settlement is slowing, but FII will remain cautious until inflation is brought under control. FII purchase still a couple of quarters away

While Maheshwari believes that retail investors have behaved maturely during this breakdown, a break below 15,000 on Nifty may trigger a further selling panic.

After yesterday’s close, tech charts suggest that Nifty50 formed a bearish pattern on Thursday’s daily charts, indicating a downtrend. The index now needs to hold 15,671 for a reversal, while it may face stiff resistance at 16,000.

On Friday, investors will be watching Indian FX Reserves data, April UK Retail Sales data, March Quarter Results and other global signals for today’s trading session.

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