Global market sell-off: What went wrong?

The sell-off in the global markets on February 5-6 came as a bolt from the blue for millions of investors. The intra-day crash of 1,600 points in the Dow Jones Industrial Average on February 5 and the more than 1,200 points opening gap in the Sensex on February 6 left the investors gasping for breath, literally. It was like a rampaging bull (or, more appropriately, a marauding bear) in a china shop, with investors running helter-skelter to seek cover. The free fall in the markets once again reminded the investors of the perilous nature of the stock markets.

So, what led to the sudden plunge in the markets? At the moment, the prime accused are supposed to be high inflation and the rising yields on US T-bills. The US Fed has hiked the interest rate and is likely to hike again over the next few quarters in a bid to control the rising inflation. This, of course, has impacted the bond yields and, as a result, the markets reacted.

Another reason is the tax cuts which the Trump administration has proposed. The tax cuts would lead to a higher fiscal deficit, requiring the Trump regime to borrow more to bridge the gap. Some analysts have blamed the disappointing growth in earnings and wages, which turned the market sentiments negative.

The Indian markets took a cue from the US markets and tanked the next day. Of course, investors here had a grouse of their own against the proposal of the government to reintroduce LTCG from April 1. The rising inflation and the tepid growth in corporate earnings in the latest quarter added fuel to the fire. No doubt, the bears had a field day.