Global Markets are in Free fall!! What are the Factors Driving This Selloff and Is It Panic or a Correction?

Market Crash


The global markets are in “free fall” with most indices down by more than a percentage point. As of now, the Sensex has crashed by almost 1500 points and it looks to extend the losses by the end of the day, today. The Nifty too has breached its “psychological” level of 1650, leaving many traders worried about this market crash. Though the Indian markets have been tracking the falls in the broader global indices, nonetheless, this selloff comes at a time of heightened anxiety about the global economy and concerns about the Omicron variant “scuttling” the fragile recovery underway. Moreover, investors are also keen to offload and book losses, which means that today’s bloodbath is a correction, rather than a panic response. However, I would not be too sanguine about the prospects for markets going forward, due to the many converging factors that have created a Perfect Storm that would continue to rattle the economies worldwide.

Here are some important reasons why we are in for a prolonged market downturn and while some of them are structural in nature, some can be classified as Black Swans (high impact and low probability events, that can surprise us all).

Worries about Omicron

Perhaps this is the biggest factor in the steep falls in global indices as the Omicron variant emerges at a time when most economies worldwide have begun “business as usual”. The prospect of more lockdowns and further hits to the economies is spooking traders, that too at a time when the holiday season is about to kickoff, which can dampen market sentiment going into the New Year 2022. Indeed, the Omicron variant can well be a “ominous sign” that 2022 would be like or worse than 2021. Moreover, a fatigued global economy needs all the cheer and rejuvenation it can and the emergence of the Omicron variant is anything but that.

The Global Economy was on Steroids, Courtesy Central Bank Printing Presses! As they Taper and Tighten, All Hell would Break Loose

Most expert commentary on the market crash happening now pins the hawkishness of the Federal Reserve and other Central Banks for the selloffs. This is especially the case with emerging markets where the difference between the interest rates in the West and in developing countries, is often the reason why Foreign Investors flock to the latter. When the West has low interest rates (as has been the case since the Great Recession of 2008) and the Emerging markets have higher rates, it makes sense to pump in money into markets in India and elsewhere, to book profits due to the interest rate differential. However, with the Fed tightening and tapering, the emerging markets would be thrown into a “tantrum” due to the “easy money” being cutoff.

Evergrande Default a Lehman Moment for Asia

While not many experts point to this factor as being contributory to today’s crash, I would certainly bet on the default of Evergrande as one of the reasons why Asian markets have been tanking. While some would say that this event has been “managed” , I doubt this explanation, and would further say that this is the Lehman Moment for Asian markets like what it was for the West in September 2008, after the bankruptcy of the American Investment bank, Lehman Brothers. Indeed, there are parallels between these two events as Evergrande’s exact liabilities and the holdings of other investors and property tycoons remains opaque, as is the “silence” around whether it is being restructured or allowed to fail.

Overdue Market Correction

The fact that global markets were due for a correction seems fairly obvious, given the rather “dizzying” climbs they have had over the past few months. Moreover, with inflation inching upwards worldwide, profit booking and diminishing returns meant that FII (Foreign Institutional Investors) are exiting those markets where lucrative yields have started tapering (again a “tantrum”) and especially as in India, where they have turned Net Negative due to the combined effect of the factors above as well as retreating from overbought positions. So, seen in this light, one can say that this “correction” would abate once valuations climb and hopefully, this would turn out to the case so that we ring in 2022 with a bang!!