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    Why does a spike in bond yields drag equity? Recall Taper Tantrum

    Synopsis

    Going ahead, investors should remain cautious and observe the synchronicity in global and domestic equities.

    Jimeet Modi

    Contributor, ET

    CEO of Samco Ventures Pvt. Ltd., Modi believes that price is the most important factor in investing. He is credited with developing the AIRM (TM), an approach to screening stocks and businesses in a scientific manner. His role model is Warren Buffett.

    Domestic equity market kicked off the week on a positive note. however, due to the excess froth in the system, the market started to cool off and witnessed selling pressure after touching new highs. An abrupt and sharp rise in domestic as well as global bond yields was the major speed-breaker, which softened the excitement of equity market participants across the globe.

    India’s 10-year bond yield rose nearly 17 bps this week and US 10-Year bond yields, too, witnessed a similar rise. As an investor, it is essential to understand that rising bond yields are a huge determinant of equity valuations. The Taper Tantrum of 2013 is infamous for how sudden rise in bond yield caused equity markets to slide, as it resulted in mass selling of bonds. Bond yields are largely inversely proportional to equity returns. Therefore, when bond yields decline, equity markets tend to outperform, and as bond yields rise, equity market returns tend to falter.

    Hence, such a sharp rise in bond yields this week could be one the major reasons for a break in the equity rally.

    Another phenomenon, which could add to our worry, is the possibility of an appreciation in the US dollar going forward. A quick look at the weekly chart of USD-INR shows the rupee has been appreciating from 74.6/$ to 72.5/$ now since November. But this week’s performance showed more of a consolidation in the currency pair. In the coming weeks, any kind of depreciation in the rupee could trigger a further fall in Indian equities, as it will give a reason to FPIs to book profit. Hence, in such times, investors having a medium-term view may partially book profit in cyclical stocks and move to quality names at lower levels.

    Event of the Week
    In the Q3 earnings season, which has come to an end now, almost 70% of Nifty50 companies managed to beat expectations at topline and PAT levels. There wasn’t one specific sector that drove the earnings, as companies across the board delivered better-than-estimated growth. Volume recovery in rural and urban markets, price hikes, lower operating costs along with various cost-cutting measures were among the factors that led to this strong performance.

    However, earnings could normalise going forward, although there will still be growth as our economy opens up completely. Valuations will see a re-rating, as earnings continue to catch up with the price action.

    Technical Outlook
    Nifty50 made a new high of 15,431 but closed the week on a negative note. The index has made a Bearish Engulfing candlestick pattern, which indicates price rejection at higher levels. The bulls are getting tired, as the index is trading much higher than its mean levels, and is at an accelerated rising channel resistance. Hence, a brief corrective dip cannot be ruled out. Nifty50 has broken the immediate support at 15,050 level and a sustained price move below the support can trigger some more profit booking.

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    Expectations for the Week
    Going ahead, investors should remain cautious and observe the synchronicity in global and domestic equities. IPOs are expected to continue to flood Dalal Street as solid listing gains continue to keep the sentiment high. Lack of any positive triggers may keep the market dull and range-bound. Therefore, investors are advised to use this opportunity to rejig their portfolios and remove the weaker stocks. Fresh investments can be made into quality bets on dips, as the market is in a longer term bull rally, with an intermediate top in the making.

    Nifty50 closed the week at 14,981, down 1.2%.

    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds.)

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    2 Comments on this Story

    Sameer Maheshwari16 days ago
    well explained
    Akhil Nair16 days ago
    Nice article.
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