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Sensex plunges over 500 points on fears about implications of oil slump

Sensex tumbled over 588.15 points to 27,254.17 and the NSENifty dipped below the 8,300-mark in opening trade on Tuesday on heavy selling by funds and investors amid global sell-off on worries about Eurozone and sinking oil prices.

Markets are heading towards their biggest daily fall in nearly three weeks, tracking lower global shares. Here are some of the reasons why markets are falling:

After six months of falling oil prices, investors are starting to worry that the prolonged slump is signaling a weaker global economy.

That fear shook financial markets on Monday as oil plunged again, dipping below $50 for the first time in more than five years and triggering a big sell-off, not just among energy stocks but across the entire stock market.

Stocks had already endured a weak opening because of concerns that Greece could leave the eurozone, adding to worries about the poor outlook for growth in that region. As oil slid further, the selling accelerated, pushing the Standard & Poor’s 500 index to its biggest loss in months.

Worries about Europe

Another area for concern is Europe.

Investors were already worried about the poor growth prospects in the euro region and the impact on global growth. Now they also have to contend with renewed speculation that Greece may withdraw from the eurozone.

European stock markets slumped, and the euro plunged against the dollar on reports that German Chancellor Angela Merkel no longer believes it would be too risky for the 19-member eurozone if Greece dropped out of the currency bloc. Elections in Greece this month could be won by the Syriza party, which wants to renegotiate the terms of the country’s international bailout, threatening its place in the euro group.

The currency was already under pressure from expectations that the European Central Bank will expand its monetary stimulus as the region’s economy struggles.

On Monday, the euro was trading at $1.1939 after falling to a five-year low of $1.1862.

The outlook for economic growth in Europe and other regions matters to companies in the US, as nearly half the sales from S&P 500 companies are generated outside of the US.

“Our companies do a lot of business with Europe, we sell a lot of goods and services there,” said Scott Wren, senior global equity strategist at the Wells Fargo Investment Institute. “Anything that hurts consumer confidence and business in Europe is going to hurt economic growth.”

In US government bond trading, prices rose as investors moved to buy the safest assets. The yield on the benchmark 10-year Treasury note, which falls when prices rise, dropped to 2.04 percent.BSE

Questions about US recovery

Since the decline began, investors have been working on the assumption that lower oil prices, caused by a glut in supply, will be a boon to the US economy. On Monday, that thesis was discarded as prices plunged further and investors started to fret about the wider implications of the drop.

“The lower that oil prices go, the more it reinforces into the market’s mind that perhaps this is more of a demand issue than a supply issue,” said Burt White, chief investment officer at LPL Financial. That raises questions “about the robustness of this recovery.”

The S&P 500 index dropped 37.62 points, or 1.8 percent, to 2,020.58. That was the biggest one-day slump for the index since Oct. 9. The Dow Jones industrial average fell 331.34 points, or 1.9 percent, to 17,501.65. The Nasdaq composite fell 74.24 points, or 1.6 percent, to 4,652.57.

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