Finance Minister Arun Jaitley’s Union Budget that seeks to rob Peter to pay Paul appears to have killed all the excitement on Dalal Street, where the benchmark equity indices were climbing new record highs every second day till Thursday.
The domestic market, which had seen a major slump soon after the Budget presentation but repaired some of the losses later in the day, saw further downturn on Friday, as painful fine print of the Budget document tumbled out in expert analysis. There was already some disappointment from the Budget due to the reintroduction of long-term capital gains tax. Fears of fiscal slippage hurt the domestic currency dampened the mood further.
Sensex Nifty declined on the Union Budget Day owing to a multitude of negative or at least not-so-positive cues that include re-imposition of 10% tax on the long term gains to the tune of Rs. 1,00,000 when equity and equity mutual funds are sold after holding for over one year. Besides this, there was no positive cue for the corporate sector, while government expressed a lot of commitment to the agrarian sector in the Budget Speech. The caution emanated from the disproportionate focus on rural economy. Sensex had fallen by 463 points to the day’s low of Rs. 35,501.74 against the previous session’s closing of 35,965.02. Nifty had also fallen by 148 points to 10,878.80 against the previous session’s closing of 11,027.70 points. The BSE Sensex rose initially beyond the 36,100-level, while the NSE Nifty rose past the 11,050-level, before paring some of the gains.
On Friday, the Sensex opened the day 350 points down and then slumped even more as the day progressed. Select stocks have slumped as much as 50 per cent in response to some duty rejig or other sector-specific policy decisions.
The Indian bond market has also responded bearishly with a spike in sovereign yields. The yield of the benchmark 10-year bond has risen to a 22-month high. This clearly signals a market that expects interest rates and yields to go up. In fact, the bond market has been looking bearish for several months. Financial sector stocks, including banks did pretty badly on Friday. Bond markets will weaken first and this will have a rub-off impact on the equity markets. Second is a synchronised growth pick-up. With valuations being high globally, earnings growth needs to rebound strongly for markets to deliver strong returns.
Trend-following systems assume that a trend in either direction will last, until some pre-set stop-loss is broken by a trend reversal. When a stop is triggered, many trend following systems advocate taking a reverse position. The crash on Friday may mean more sell signals in future sessions, as traders close out long positions and take short positions. Inexperienced retail traders could cause more grief if they panic and redeem mutual funds alongside direct equity sales.
The technical reaction is clearly broadly bearish. Small and midcaps, which have a large retail presence, have done even worse than the Nifty and Nifty Next50. The crash on Friday will have triggered popular trend-following systems, which means more selling is likely.