-By Rayavarapu Hema Sri Harsha
Why do you think the World unites for a Market crash?
The Financial Markets in India and everywhere on Monday, August 5, 2024, were rattled by developments in the U.S. and Japan, the world's leading economies with significant ties to the Global Financial System. It was due to concerns about potential recession in the United States driven by disappointing job data and the unwinding of yen carry trades with an increase in interest rate.
During this period the Sensex fell about 3.3 per cent or 2,686 points before ending the session at 78,759 down 2,223 points or 2.74 per cent than Friday's closing. Similarly, Nifty50 dropped 670 points or 2.68 percent, close to 24,048.
For both indices, this is the sharpest decline since Lok Sabha Election results on June 4,2024. The overall market capitalization of the firms listed on the BSE dropped to nearly ₹442 lakh crore from nearly ₹457 lakh crore in the previous session, making investors lose nearly ₹15 lakh crore in a session.
FII’S MOVEMENT ON 5TH AUGUST:
Global Index Decline:
1. U.S.Recession fears :
July marked the fourth consecutive month for an increase in the unemployment rate in the US where the unemployment rate escalated from 4.1% to 4.3% compared to June. The rebound in the local stock markets has been fuelled mostly by a consensus forecast of a soft landing for the US economy. This assumption is now threatened by a decline in US jobs. Dow Jones Industrial Average futures dropped 705 points or 1.7 percent. S&P 500 futures shed 145 points (2.7 percent), and Nasdaq-100 futures lost 750 points (4 percent).
2. Rise for the tensions in the Middle East - Geopolitical issues
The rising threats and provocative actions from both Iran- and Israel have heightened fears of an imminent war. This leads to a spike in oil prices, thereby Indian airlines will face margin pressures that affect the stock prices and profitability due to increasing operating expenses.
3. Increase in Yen rate:
The unwinding of the Yen carry trade, has had a big influence on the Japanese market. The Nikkei index fell by more than 4%, signalling a Japanese market catastrophe and an increase in interest rate by 0.25%. Due to the shortages in labour and sinking currency Japan was overtaken by Germany as the third biggest economy.
4. Inflation and Consumer Preferences:
The largest percentage of U.S. economic growth is mainly due to its consumer which accounts for 70% of the Gross domestic product. But still, consumers expect a decrease in inflation, where the recession continues for a few more months. This prolonged inflation rate leads to a significant decrease in consumer purchasing power which leads to a hike in the interest rates.
Behaviours of Stock Market Crash:
Investors panic when there is a sudden deprive in the stock market that leads to the selling of stocks
Panic Selling: When there is a rapid decline in the stock prices the investors sell the stocks without holding them due to fear and interpreted negative signal. Panic Selling leads to a liquidity crunch where there are not enough buyers in the market to match the number of sellers. It also leads to Increased market volatility, causing irregular springs in the stock prices and further unsettling investors. It also leads to amplified Market movements where the investor follows other's actions rather than relying on their analysis. This leads to Bubble formation where the asset prices are above the intrinsic value which leads to a rapid selloff.
IMPACT ON SHORT-TERM AND LONG-TERM ECONOMIC EFFECTS:
Due to the sudden market crash, there will be an effect on the economy that leads to Short-term economic effects like reduced Consumer and Business Spending: Due to the uncertainty both the business and the consumer try to cut back, which leads to a decrease in demand for goods and services.
The companies try to reduce their costs to preserve the profits. Investors follow the flight to safety by moving their money into safer assets like government bonds. Long-term economic Effects like prolonged market downturns lead to recession which leads to Negative GDP growth. Consistent layoffs lead to higher unemployment rates which make the worker hard to re-enter into job market. Consumers will prioritize saving their money instead of spending and many more like changes in workforce adaptation by upskilling and retraining.
CAPITAL MARKETS- EFFECTS
NASDAQ (National Association of Securities Dealers Automated Quotations)
NASDAQ was affected by a stock market crash which led to a substantial decline in tech stocks as the "Magnificent Seven" like Microsoft, Amazon, Google, Apple, Nvidia, tesla and Meta platforms fell up to 6.5 percent which is nearly a wipeout of $900 billion from these companies together.
NYSE (New York Stock Exchange)
The impact was mainly on technology, finance, and consumer goods. Major indices like the Dow Jones Industrial Average and the S&P 500 experienced significant losses.
FSE (FRANKFURT STOCK EXCHANGE)
The impact was on the automotive and industrial sectors where it saw a significant loss in the German companies. The DAX index has seen a major market turn down.
TSE (Tokyo Stock Exchange)
The Nikkei 225 index fell impacted investors in Japan. It saw a decline in particularly technology and automotive sectors.
Despite the broader downturn of the Market some of the companies like WEC Energy Group and Entergy remained attractive due to their high dividends and steady earnings growth. This sector benefits from electricity demand from data centres.
Stocks in vehicle sector such as Aptiv, Luminar technologies and Micron Technology showed potential growth because of advancement in technology and promising partnerships with the major manufacturers.
Traditional Telecommunications providers like American Telephone and Telegram and Verizon were trading at significant discounts while offering high dividend yields.
SOLUTIONS AND MITIGATING FACTORS:
Investor Education: Educating the investors about the market dynamics and long-term investment that helps in mitigating risks.
Diversification: Instead of investing your money only in a single asset diversifying the amount into various stocks can lead to profit depending on the risk tolerance levels.
Guarantee: Investors can opt for treasury bills and fixed deposits that yield profits irrespective of the market price.
Global Coordination: International collaboration and coordinated policy actions can stabilize global markets and promote economic recovery.
Conclusion:
The stock market crash had an impact on the global financial markets of major indices like NYSE, LSE, TSE, SSE, AND HKEX experienced sharp declines. The effects were on all commodities, bonds, and derivative markets not just on equity markets. Tata Motors, Adani ports, Infosys, Tata Steel, State Bank of India, and JSW Steels lose their stocks from 4 percent to 6 percent approximately. Overall, it disturbed the Income distribution and the psychology of public confidence.
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