COVID-19 to weigh heavy on markets

The Indian Equity market continued its sharp slide downwards for the second consecutive week, ending the market at six months low, on fear of fast-spreading coronavirus cases outside China which may prolong the global economic slowdown.

Investors also got concerned about the Yes Bank crisis and its repercussions on the financial system. US Fed in an emergency cut its benchmark interest rate by 0.5% in an effort to support the economy. It was followed by rate cuts from other central banks globally and fiscal packages by various governments. Even the IMF announced a stimulus worth $50 billion.

However, despite the collective efforts to support the global economy, global markets failed to cheer and plunged steeply on rising fear.

Oil prices fell to $48/barrel due to worries that non-OPEC oil producers might not agree to output cuts even though global energy demand is weakening. On the other hand, the Indian rupee weakened beyond 74 while gold touched Rs 44,700.

Both Nifty 50 and Sensex fell 1.9% each to close at 10,989/37,577 for the week. The broader market fell more than the benchmark, with both Nifty Midcap 100 and Nifty Smallcap 100 down 2.4% and 4.1% respectively.

All the sectors ended in red, except Pharma and IT which were up 5.8% and 3% respectively. Media was the biggest loser, down 8.6% during the week, followed by PSU banks (-7.8%).

FIIs continued to be net sellers, selling equities worth more than Rs 10,720 crore while DIIs were net buyers to the tune of Rs 10,093 crore.

Bank Nifty crashed over 3.5% on Friday after the surprised and quick action on YES Bank taken by the RBI to resolve the issue. RBI imposed a moratorium of one month and expects to announce a credible restructuring plan in the next few days. Reports also indicated that SBI and LIC might take control of the board soon by acquiring a 24.5% stake each in the bank.

The rising cases of coronavirus outside China have led to serious worries over fears of a prolonged global economic slowdown.

Even a few cases of coronavirus have been reported in India which has further dampened investor sentiments domestically and kept the markets highly volatile. If not continued well, the spread of the virus can have a significant impact on the domestic consumption-driven economy which is already under significant pressure. In fact, this event has introduced additional downside risks to our earnings estimates for FY21.

Till we see a semblance of normalcy returning, markets are likely to remain under pressure and highly volatile. Fluctuations in FII equity flows can also add to volatility. Meanwhile, select sectors with better earnings visibility would continue to enjoy valuation premium over broader markets.

Technically, Nifty formed a bearish candle on a weekly chart. Resistance is gradually shifting lower and now 11,250-11,430 levels would be an immediate hurdle for the index. While support is placed at 11,800-11,650 zone.

Till the time, volatility doesn’t cool down, the price settles and we don’t see a strong reversal signal in data; traders shall avoid bottom fishing as it is the same as ‘catching a falling knife’.

(The writer is the Head of Retail Research at Motilal Oswal Financial Services Limited)