Bear in a China shop: Covid fear grips equity markets again

In China, the Shanghai Composite tumbled 5% and the Shenzhen Composite slumped 6.1% on concern the world’s second-largest economy is struggling to contain the pandemic despite a strict lockdown in Shanghai. Over the weekend, China ordered mandatory tests in Beijing and locked down some areas of the city. Investors are worried about the economic aftermath of China’s zero-Covid policy. The Stoxx Europe 600 dropped 1.8% to close at its lowest since mid-March while in the US, Dow Jones, S&P 500 and Nasdaq Composite were all trading in red at the time of going to press.

If China decides to implement stricter restrictions, the impact will be felt on the rest of the world, fund managers said. “Covid is a big risk in China. China’s GDP growth estimates have also been revised down,” said Vinit Sambre, head of equities, DSP Investment Managers.

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Fear Gauge up 15.8%

“This is the second-largest economy in the world, where a big part of the supply chain resides, and this may accentuate shortage issues and cause inflationary problems. The developed world is already talking of recessionary scenarios,” Sambre said.

Pharmaceutical and chemical companies, which use Chinese raw materials, may be worst hit, said Sambre. More supply chain blocks could accelerate inflationary pressures, forcing central banks in the developed world to tighten monetary policy sooner.

At home, shares of metal companies were among the top losers on account of the global selloff in commodities, weighed down by worries about China. Tata Steel dropped 4.5%, SAIL fell 4.2% and Hindalco declined 3.5%.

The Volatility Index or VIX shot up 15.8% on Monday, suggesting traders see risks to the markets in the near term.

“It would be crucial to see how things pan out in the coming session and if the Nifty sustains below 16,900 then one should brace up for challenging times going ahead where 16,600 and below levels may be retested,” said Rajesh Bhosale, technical analyst, Angel One. “The only bright picture for the session was the Bank Nifty showed some relative strength as compared to the benchmark. If the Nifty has to hold the key support, the Bank Nifty needs to show a strong performance.”

Shares of large lenders bucked the weak broad market trend with the Bank Nifty index edging 0.1% higher. HDFC Bank rose 1.1%, ICICI Bank gained 1% and Bandhan Bank moved up 0.9%.

Analysts said the continued conflict between Russia and Ukraine could keep crude prices elevated.

“The biggest risk remains oil prices,” said Sambre. “It is still manageable if oil prices are at $100 per barrel but if it settles around $150 (a barrel) or so it will be quite detrimental on the macro front.”

Foreign portfolio investors sold Indian shares worth Rs 3,300 crore on Monday while domestic institutional investors bought shares worth Rs 1,870 crore.