Sensex, Nifty slump: What triggered the global sell-off?

 BusinessToday.in        Last Updated: February 7, 2018  | 12:49 IST
Sensex, Nifty slump: What triggered the global sell-off?

The global stock markets - Dow Jones, Nikkei and S&P- are down, and down badly. Some calling it 'market mayhem' and some calling it 'carnage'. Financial analysts are calling it a correction long due. The fall in markets robbed investors of nearly Rs 5 lakh crore in just few hours of early trading in India. Sensex and Nifty today crashed over 3 per cent - currently trading under 34000-mark - due to global sell-offs. What triggered this downfall in world markets?

Ripple effect: It started in the US after the Labour Department put out a report on jobs, showing the fastest growth in employment wages in last one decade. According to the report, US economy added 200,000 jobs and wages grew by 2.9 per cent. It raised the alarm about rising inflation that could eventfully force the Federal Reserve to hike interest rates to control the inflation. And if the Federal Reserve raises the interest rate, investors feared that the time of cheap money would come to an end. These worries prompted the investors to go for profit booking and sell-off their holdings. The sell-off created panic that brought the Dow Jones down by over 1100 points on Monday. It was the biggest drop in single day since 2011.

Donald Trump's Corporate Tax Cut
Another possible reasons for this market crash are US President Donald Trump's latest corporate tax reform and strong economic fundamentals such as the lowest unemployment in 17 years, lower inflation and strong economic growth. Trump has cut the corporate tax from 35 per cent to 21 per cent with a commitment from industry to create more jobs and boosting investment. Days after tax cut, few firms committed to invest more money in the US and create jobs with higher wages. Financial analysts believe that it means more capital in market which could fuel inflation further.  

How Indian markets reacted?
During early trade, Sensex was down by 1,275 points, however, it managed to recover some of the lost ground and closed at 561.22  points lower at 34,195.94. In last three days, the market capitalisation of BSE-listed companies have come down by Rs 9,60,938 crore to Rs 1,43,39,062 crore.

Sensex and Nifty are on a continuous decline since February 1, coincidently the same day Finance Minister Arun Jaitley announced 10 per cent tax on long term capital gains in Budget 2018. Investors have linked the market crash to LTCG tax. However, Finance Secretary Hasmukh Adhia said that the decline in the key stock market indices was primarily due to global market meltdown.

Today he said: "What happened on February 2 and February 5 was mainly because of global shake up that was happening. Of course there is a ripple effect of whatever happens in the world on Indian stock market. Most of it is because of the global market otherwise the Sensex and the Nifty would have come down on the first and the second day (of Budget)."

 

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