Moneycontrol Pro​ Panorama | The smoke signals that markets are sending

Dear Reader,

An answer to where equity markets are headed is foretold by the bond markets, goes one school of thought. That certainly seems to be playing out now as an increase in yields globally is spooking investors in equities.

After last week’s calm reception to the US Federal Reserve’s statement, what prompted a rethink this week? There’s no convincing answer to that, but that’s the way markets are. Bond markets are headed for their steepest price decline since the start of the year, says this FT article on the subject (free to read for Pro subscribers). The growing number of central banks in the taper room, the persistence of inflation even if it is labelled as transitory, China’s Evergrande crisis, and the energy crisis are all providing fodder for rising yields.

The energy sector is witnessing turmoil that appears to have come out of the blue, but it actually has its origins in the period before the pandemic struck, we write in today’s edition. In addition, more factors have emerged to drive up prices of oil, gas and coal. Have we gone too far in trying to undo damage to the environment is a question this episode can raise. To which, the climate activists could ask if we have gone too far in damaging the environment. Time will tell.

Domestic bond yields are firming up too, with the benchmark 10-year government security’s yield rising by about 2 points, instead of falling as expected, a day after the government announced its borrowing calendar for the second half. To know the factors that will determine the direction of the bond market, do read our take on this issue.

Why are equity markets running scared? The US markets were down sharply yesterday and that’s spilling over into domestic markets, too. Our second FT selection for the day sums it up nicely, “The only way to think that real yields can stay negative is if you think growth is going to disappoint, or the Fed is going to flinch and delay tapering and tightening, or both. Otherwise, it seems to me that there is only one way for rates to go — up — and the important question is whether they drift up or spike up.” Whether it’s a strong recovery or just rising prices driving rates up could determine if equities matter for investors.

Today’s edition is rich with analysis that should help you make sense of what’s happening in markets. But again, many of these factors were present last week also. For some reason, the risks are getting more play this week. What’s reasonable to say is that an exit from a global monetary and fiscal monetary stimulus programme is likely to cause volatility, as a number of stakeholders make assumptions and act on them. Do review your portfolio and asset allocation to see that your risks are manageable in the face of this sort of volatility.

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Ravi Ananthanarayanan

Moneycontrol Pro​