Surge in bond yields and rising commodity prices may cause limited upside for the equity markets
Published On: Friday, February 26, 2021 | By: Team KnowMyStock
A sharp surge in bond yields and rising commodity prices have come back to haunt equity markets, with most analysts expecting a limited upside for the equity markets. Today(26th Feb.2021), Asian stocks traded sharply lower after Wall Street's main indexes tumbled, with technology-related stocks under pressure following a steep rise in benchmark US Treasury yields, which hit their highest level since the pandemic began – up 14 basis points (bps) at 1.5286 percent. The surge came on the back of expectations of a strong economic expansion and related inflation. “In line with the global trend, Indian yields have definitely bottomed out. Since the expansionary budget in February, Indian 10-year is up 28 bps to 6.18 percent despite RBI’s verbal and explicit market support. The gap between earnings yields (1/Nifty one-year forward PE) to 10-year bond yield is now at 156bps, which is 57bps higher than the long-term average,” said an expert.
Since their March 2020 low, the Indian markets have mostly have been on a secular uptrend. Frontline indices – the S&P BSE Sensex and the Nifty 50 – have surged 92 per cent and 94 per cent, respectively till February 25. The rally in the mid-and small-caps has been sharper, with both these indices rallying 106 per cent and 128 per cent, respectively on the BSE during this period, as the data speak.
Rising commodity prices, on the other hand, pose another challenge. Brent crude oil prices, for instance, have vaulted nearly 250 per cent to around $66.59 a barrel now since their April 2020 low. Copper prices traded near 10-year high, while other base metals also gained as the US Federal Reserve reaffirmed its loose monetary policy to support growth in the world’s largest economy.
According to a recent report by BofA Securities, 31 Nifty50 companies, or 46 per cent of free-float weighted Nifty market-cap, are exposed to commodity-related risks and cautions that the full impact of the rise in commodity prices is yet to play out.
In this backdrop, analysts see a limited upside for the markets and see the indices enter a phase of consolidation.
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