Market setup | Tax increase on financial instruments sours mood

Markets have fallen for the third straight week due to the global banking crisis, rate hikes by global central banks and amendments to the Finance Bill. The Nifty fell 1 percent, and broader markets underperformed.

Initially, it seemed that things were settling down with the US banking issues, and the Budget was almost six weeks old. However, recent events have dampened the mood of investors. Tax increases on financial instruments have also soured sentiment. While the tax increases are not huge, the lack of mention of any of this in the Budget has left investors feeling unsettled.

The Nifty now looks close to retesting the 16,800-16,850 levels, having had two touchpoints on that level in the last 10 days, both of which were respected. Investors are concerned that these tax increases will hurt rather than help the markets incrementally.

So what changed between the first of February and today for these completely new things to come about?

The global markets have been experiencing a one-step-forward-and-two-step-back kind of movement just in terms of price action. The recent dovish shift by the Federal Reserve and Treasury Secretary Janet Yellen's comments are also causing concern. The Fed has said that it does not want to hike interest rates due to the expected impairment of credit in the US system, which will cause credit to tighten.

On the other hand, Yellen's comments suggest that the US government will only intervene when the threshold of pain is high and when the situation is on the verge of becoming systemic.