What to Know What Caused Yesterday's Market Massacre?

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They say that when it rains, it pours.

In yesteray's case, it wasn't a pouring as much as it was an outright hurricane.

The BSE Sensex fell almost 900 points yesterday, making it the largest single one day fall in almost 5 years.

However, what's curious, interesting, and perhaps a little frightening is the fact that there wasn't a single, outright reason for the fall.

The fall occurred due to an amalgamation of circumstances. A Black Swan could be an apt way to describe the event.

So what caused the fall?

A mixture of legitimate reasons combined a propensity for traders to over-exaggerate news.

In essence, in chronological order, the fall was spearheaded by the following events.

  • The US markets, at around 1:35pm EST on Monday, which translates to past midnight here on Tuesday morning (IST, meaning yesterday), Crude oil prices fell below $50 for the first time since April of 2009. This shocked the markets, since the implications of low oil prices are wide ranging.As you can see from this graph,  at right after 13:30pm EST is when crude fell below 50, as mentioned above. We need to keep in mind that crude oil prices were at $110/barrel in June of 2014! A month ago, it was trading at $70 per barrel. Now it has pummeled to below $50. Whenever any commodity falls or rises so quickly by such a large amount, markets get worried. It is not necessarily the consequences of the price fall that spooked the markets, but the dramatic fall itself.
  • Adding to the turmoil was the news that Greece could very well opt out of the Euro zone with the upcoming elections. For the uninformed, Greece is a complete mess at the moment. Greece has been in debt since 2010 and has been forced to be bailed out by its Euro zone partners. However, since 2010, conditions have not significantly improved and there is a political and economic upheaval occurring in the nation. There is a very real possibility that the current and future bailout programs could fail.
  • The Euro hit it lowest point against the US Dollar later in the day, trading at 1.17 USD per Euro. Futures markets are expecting the Euro to possibly fall further as the dollar continues to strengthen, with some speculating that the Euro might hit the unthinkable- one Euro per US Dollar.
  • Finally, India's Services PMI figures were released during market hours, signalling a slowdown in the services sector.

Next Steps?

The RBI must come to the rescue. RBI Governor Raghuram Rajan has been staunch in refusing to allow the headline repo rate to be cut, but consumer confidence is a must-need in India right now. A rate cut might do the magic to boost morale in the markets. It remains to be seen with Rajan will come to terms with the Finance Minster and agree on what all are clamoring for.

Until then, sit tight and don't let minute to minute swings affect your trading methodology. The race is won by the tortoise, not the hare 😉


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