Corona variants have markets on tenterhooks

A resurgence in covid-19 infections, driven by the Delta variant, is said to be making investors nervous. In the US, the Dow Jones Industrial Average posted its steepest drop in nine months on Monday. Consequently, the fear-gauge, Cboe Volatility Index, or VIX, spiked to a two-month high. While there is still ample liquidity in the system, rising covid caseloads have fuelled doubts about the pace of global recovery and inflation. Covid-led growth concerns soured sentiment across asset classes including crude and emerging market currencies, with bond yields also softening.

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Which sectors, stocks were the casualties?

Travel, tourism and hospitality remain the worst-hit. Concerns about re-introduction of lockdowns sent shares of InterGlobe Aviation Ltd (Indigo) down 5% on Tuesday. Indian Railway Catering and Tourism Corporation (IRCTC), Indian Hotels Company Ltd, and Lemon Tree Hotels Ltd stocks were also under pressure. While most sectoral indices ended the day’s session in the red, the Nifty Metals index declined nearly 2.5%. Investors booked profits in metal stocks after the price of copper, an indicator of the health of the global economy, slid to a one-month low.

How is the earnings season panning out?

The June quarter earnings in the US have been decent, lending some support to equities. A widely held expectation is that India companies’ earnings are bound to look good aided by the low base of last year. But so far, it has been a mixed bag. Investors need to watch out for a rise in bad loans and delinquencies, especially after HDFC Bank’s weak Q1 earnings.

What is the outlook on liquidity?

Central banks are yet to reverse their loose monetary policy stance. In June, the US Federal Reserve left the key interest rate unchanged, but its forecasts now signal a hike in 2023, a year earlier than previously expected. The Fed said in June it has started talks about scaling back bond purchases. Since the US Fed is trend-setter, an earlier-than-anticipated unwinding of quantitative easing programmes would be a dampener for equities. The Jackson Hole meeting scheduled in August would be closely watched for further clarity.

How severe is the correction?

Not very: it’s a mere 2-4% from the peak. But, driven by abundant liquidity, Nifty 500 and S&P 500 are 33% and 26% above their pre-covid highs. This means that global equity investors have taken the pandemic in their stride. That said, lofty valuation of Indian stocks is making analysts wary. Analysts caution against froth, especially in Indian midcaps and smallcaps, which have seen a massive rally with hardly any fundamental factors backing them. So, analysts say, the market was ripe for some correction.