Markets drop as much as 0.9% as yields rise on Fed hawkish comments

The benchmark indexes fell for the second day in a row as US bond yields rose amid fears of an excessive reduction in the Federal Reserve’s $9 trillion balance sheet. Most of the risky assets were corrected after Fed Governor Lyle Brainard commented that the central bank will start reducing the balance sheet “at a rapid pace” as soon as next month. Experts said the markets have not yet determined such a possibility.

The benchmark Sensex index ended the session at 59,610 points, down 566 points, or 0.9 percent. On the other hand, the Nifty index ended the session at 17,807, down 150 points, or 0.8 percent.

Reports of new sanctions against Russia also weighed on sentiment. Investors were concerned that Russia’s increasing isolation from international trade would further disrupt commodity flows. The new sanctions include a possible US ban on investment in Russia and a European Union ban on coal imports.

Globally, central banks have prioritized tackling inflation after describing price hikes as a passing phenomenon last year. A combination of supply-side turmoil and geopolitical tensions have pushed up commodity prices.

Experts said investors are looking forward to the Fed’s meeting minutes, which are expected to give insight into the pace of interest rate hikes and the process of tapering off the Fed’s bond holdings. Also, the Reserve Bank of India’s interest rate decision on Friday.

“Weaker global signals led to some weakness in the local market, as investor sentiment turned cautious after the more hawkish tone from the US Federal Reserve. With this development, a sharp movement was seen in US 10-year bond yields, which topped 2.6 percent levels. Since the last Monetary Policy Committee (MPC) meeting, many factors such as geopolitics, oil and commodity prices, bond yields and inflation expectations have changed.Due to rising commodity prices, inflation expectations have been pushed up by Niraj Chadwar, Head of Quantitative Equity Research, Axis Securities. Top besides, the position of the Reserve Bank of India remains critical at this point.

The US 10-year bond yield rose 2.63 percent, the highest since March 14, 2019.

Overseas investors sold shares worth Rs 2,280 crore, while local institutions provided buying support worth Rs 623 crore.

Markets have rebounded more than 13 percent from their March lows. The sharp recovery came despite the shockwave caused by high oil prices.

“Indian stocks have held up remarkably despite the rise in oil prices possibly due to the shift in current account financing to FDI, which makes the oil impact linear rather than non-linear and also allows for more flexibility in domestic policy, lower oil intensity in GDP , cheaper sources of oil, positive domestic policies that reinforce the government’s tendency to raise corporate profits, high relative real policy rates, a new profit cycle, structural domestic bid on stocks, and increased positivity of multinationals towards India,” according to a Morgan Stanley note.

The breadth of the market was positive, as 2142 shares rose and 1277 shares declined. A round of 183 stocks reached 52-week highs. Two-thirds of Sensex shares ended the session with losses. HDFC Bank and HDFC Bank were down 3.5 percent and 3.3 percent, respectively. The HDFC twins were the worst performing and largest impact indicators. The financial sector was the most declining, and its sectoral index decreased by 1.25 percent.

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