Sensex plunges 1,939 points; rising bond yields, commodity prices rattle investors

Updated : February 26, 2021 04:56 PM IST

The 30-share BSE Sensex closed at 49,099, down 1,939 points.

The 50-share NSE Nifty fell 568 points or 3.76 percent to close at 14,529.

Benchmark indices Sensex and Nifty nosedived on Friday, mirroring the bearish mood in world markets, as investors are getting worried about rising bond yields and commodity prices.

The 30-share BSE Sensex closed at 49,099, down 1,939 points or 3.8 percent over the previous close, after touching a low of 48,890 intraday. The 50-share NSE Nifty fell 568 points or 3.76 percent to close at 14,529, after touching a low of 14,468 during the day.

Second-line stocks too were hammered with the BSE Midcap and Small Cap indices dropping 1.6-1.7 percent.

The selling intensified in the last fifteen minutes of trade as many traders who were holding on to their long positions hoping for a late recovery, unwound their positions as prices remained depressed.

The Sensex and Nifty had opened sharply lower following the overnight selloff in US equities, and the weakness in key Asian markets.

Rising yields

Yields on the US treasury have been steadily inching up over the past couple of weeks, and so have been the prices of key commodities like copper and gold.

Higher bond yields in the US indicate that the market is expecting inflation to rise, as economic growth picks up steam. This is being viewed negatively by stock market investors who feel rising interest rates could hurt profits, making current valuations appear expensive.

Yields had been rising for a while, but most investors were confident that the US Federal Reserve’s commitment to keep interest rates low would prevent the situation from getting out of hand.

Stocks globally have been rising since last March, and are now beginning to look expensive, relative to their earnings growth potential. Fed Chair Jerome Powell earlier this week had said that expensive valuations reflected a positive outlook on the economy, and that near term inflation would be transient because of the base effect.

Commodity prices

Rising commodity prices too are causing anxiety to equity investors as companies’ raw material bills will increase, resulting in lower profits.

Some market watchers are predicting that a commodity super cycle is underway, meaning that commodity prices will continue to rise for a long period of time.

But there are skeptics of this theory, who blame the surge in prices of copper and other metals to shortages caused by inadequate supply rather than a huge increase in demand.

Currency impact

The bigger worry for investors globally right now is rising US Treasury yields, as this could prompt a partial shift of funds from risk assets like emerging market equities, into US Treasury bonds. This could strengthen the dollar and in turn make matters worse or emerging markets as their currencies weaken against the dollar. Oil importing countries like India in particular would be hit hard at a time when crude prices are on the rise. A higher import bill would further wreck the government’s already fragile finances just when the economy is beginning to recover.

Experts’ views

Geoffrey Dennis, independent emerging markets commentator, told CNBC-TV18 that emerging markets will be impacted by any weakness in US equities, and that the bond yields could rise a lot more, unless there is a strong response from the US Federal Reserve.

Laurence Balanco of CLSA feels that in the worst of scenarios, the Nifty was likely to find support at 13,500 and that even a fall till 13,500 would not alter the bullish case for the Indian market.

Arvind Sanger of Geosphere Capital said that a correction was long overdue and that a decline of upto 10 percent was normal in a bull market. He said it was time to look at a fresh set of stocks that could lead the market higher. He is bullish on cyclical stocks.

Sanjay Mookhim of JP Morgan India told CNBC-TV18 that the dovish stance of central banks globally would continue to push stock markets higher. He was of the view that bond yields have not yet hit worrying levels, and that global liquidity remained strong. As for the Indian market, the key to track would be the earnings recovery cycle.

Published : February 26, 2021 04:37 PM IST

Sensex plunges 1,939 points; rising bond yields, commodity prices rattle investors

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