The Sensex is trading at 78,500 levels, down by about 2,500 points. On the other hand, Nifty is testing the 24,000 levels, down by over 660 points.
Fear of an onset of recession in the US
The chief cause of the crash is linked to the uninspiring jobs report from the United States which has aggravated fears of a potential onset of recession. Worldwide, investors have become more cautious following the jobs report from the US that was weaker than anticipated, raising concerns about slowing economic growth.
In July, the US unemployment rate increased to 4.3 per cent, and nonfarm payroll employment grew by only 114,000, fuelling fears of a weakening labour market and economic slowdown.
“The widespread belief in a soft landing for the US economy has largely fueled the surge in global stock markets. This belief is now at risk due to the decline in US job creation in July and the sharp increase in the US unemployment rate to 4.3 per cent,” stated V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
A report from Nomura indicated that the July employment report in the US showed significant cooling in the labour market. Although the data appears inconsistent, the risks are leaning towards the downside.
“Beyond the disappointing job gains and the unemployment rate, the household survey revealed an increase in job losses, which is often a precursor to a downturn. An unusual rise in temporary layoffs and signs of a negative weather effect suggests that the increase in job losses might be a temporary anomaly rather than the start of a worsening trend,” Nomura explained.
Spectre of Israel-Iran war following the assassination of Hamas leader Haniyeh
Additionally, geopolitical tensions in the Middle East have contributed to the market’s decline. Fear of a full-blown war looms as Iran has vowed to take “revenge” for the killing of the Hamas chief, stating that the retaliatory actions will be “more diverse, more dispersed, and impossible to intercept.” The country is expected to launch an attack on Israel at any time.
Hamas leader Haniyeh was killed in a bomb blast in a special guesthouse during his stay in Iran for the presidential inauguration. A bomb planted months ago was detonated remotely, which caused the death of the Hamas leader. While Israel has not claimed its role in his assassination, Iran has stated that it was the handiwork of Mossad, the feared Israeli intelligence agency known for carrying out stealth assassinations of terrorists working against the interests of the Jewish nation.
Japan’s Nikkei plunges to 37-year low
Besides weaker jobs data in the US and the fear of a looming Middle-East war, the mass sell-off in the Indian market was also triggered by an unprecedented crash in the Japanese stock market Nikkei, a shorthand for the Tokyo Stock Market Exchange.
Japan’s Nikkei 225 share index plummeted down to 10% on Monday due to heavy selling driven by fears that the U.S. economy might be in worse condition than previously thought and a surge in Yen.
By mid-afternoon in Tokyo, the Nikkei index had fallen over 3,500 points to 32,385.01.
After already declining 5.8% on Friday, the index is now on track for its worst two-day drop ever.
The last time the Nikkei experienced such a severe drop was during “Black Monday” in October 1987, when it fell by 3,836 points or 14.9%.
This recent decline follows the Bank of Japan’s decision on Wednesday to raise its benchmark interest rate to approximately the same level as a year ago.
Share prices in Tokyo have been falling since the announcement.
In addition, Asian equities plunged to multi-year lows on Monday as investors fled from risky assets to safe-haven bonds, driven by concerns that the Federal Reserve’s prolonged fight against inflation might have pushed the United States into a recession.
While the Indian economy is quite resilient to changes in the economic policies of other countries, as the 2008 global crisis demonstrated when India emerged from it reasonably unscathed and surging domestic demand, the Indian markets, however, cannot remain immune to the vicissitudes of a volatile world economy, racked with wars, weak job growth, and choppy investor sentiments in the short term.
In the long run, however, the Indian stock market is set for sustained growth, supported by a robust influx of both foreign and domestic investments as India marches towards becoming the third largest economy in the world by 2027-2028.
