Indian markets brace for steep fall as global markets nosedive

Mumbai: Indian markets are set to open sharply lower on Friday, mirroring the bloodbath in world equities, as investors fret over strong bond yields with US treasuries rising close to four-year highs.

US stocks nosedived around 4% on Thursday in another violent session, moving into correction territory, and Asian markets traded sharply lower with Japan’s Nikkei dropping 2.25%, while China’s Shanghai Composite index shed around 3%.

“Good economic performance does not necessarily lead to good market performance, and this is a classic example of that in the world markets,” said Vaibhav Sanghavi, co-CEO, Avendus Capital Public Markets Alternative Strategies LLP.

“We are seeing strong economic data pouring in from developed economies, however markets are taking cognizance of the risk in terms of interest rates and liquidity,” added Sanghavi, adding that Indian markets were likely to open lower on Friday, tracking world equities.

Concerns over firming inflation and bond yields, triggered by strong US jobs report has triggered the selloff in US market this month, the rapid unwinding of heavily leveraged trades is leading to a domino impact on the market fall.

“US 10-year bond yields have touched 4-year high of 2.85% This has led to a sharp plunge in Dow as of now. And this is happening when the US Fed hasn’t even started unwinding meaningfully it’s bloated balance sheet,” said Ajay Bodke, chief executive and chief portfolio manager at brokerage Prabhudas Lilladher Pvt. Ltd.

Global central banks had bought around $16 trillion of bonds to stabilise financial markets and kickstart growth post 2008 crisis, and Preisdent Donald Trump’s $1 trillion infra build-up plan would add to worries about US fiscal deficit putting additional pressure on bond yields.

“ …record-low jobless rate and high capacity utilization (or low slack) in the US economy has sparked worries about wages-led inflationary pressures forcing Fed to slam the brakes by rapidly increasing interest rates.

“Whispers of leveraged ETFs (triple or double leveraged) and ETNs lurking in the wings to trigger massive volatility and play a role akin to that played by leveraged mortgage-backed securities (MBS) and other complex derivatives before Lehman crisis, has started doing the rounds, “ said Bodke.

ETFs refer to exchange-traded funds, while ETNs are exchange-traded notes.

In India, while long-waited corporate earnings recovery seems to be underway with some greenshoots in sight, for now, the domestic markets are going to take cues from world equities for near-term direction.livemint