Bond yields, global economic recovery trouble Sensex, Nifty this week; where is D-Street headed now?

Equity markets went in for a correction in the latter half of this week, after having soared more than 11% since the Union Budget. S&P BSE Sensex erased 654 points or 1.27% and the 50-stock NSE Nifty slipped 181 points to close just below the crucial 15,000 mark. Many analysts on Dalal Street had warned of such a correction and had been advising investors to remain cautious. But, where do the benchmark indices move from here? Will they resume their upward march or are the bears patiently waiting for Monday?

What’s causing the fall?
The correction has not just been limited to Indian stock markets but has been similar in indices across the globe. “The market was largely in a consolidation phase throughout the week following weak global cues. Bears took control of the markets across the globe as worries of increasing US Bond yield and inflation kept investors mood gloomy,” said Vinod Nair, Head of Research at Geojit Financial Services.

Primarily analysts believe it were the bond yields that cooled equity markets. “A sudden rise in domestic as well as global bond yields was a prime hindrance which moderated the enthusiasm of equity market participants throughout the world. Akin to 10-year G-Sec yields which rose nearly 17bps this week, US 10-year bond yields too saw a similar rise,” said Nirali Shah, Head of Equity Research, Samco Securities. “Bond yields are inversely proportional to equity returns and when bond yields decline, equity markets tend to outperform while when yields rise equity market returns tend to falter,” she added.

Charts suggest short-term weakness
Friday’s fall in Sensex and Nifty was the fourth consecutive day of ending in the negative territory. “A reasonable negative candle was formed with minor upper and lower shadow,” said Nagaraj Shetti, Technical Research Analyst, HDFC Securities. He added that this pattern indicates a continuation of weakness amidst a range movement or volatility. On the weekly charts as well, a negative candle was formed, hinting at further negative implications for the market.

Although the short-term momentum for Sensex and Nifty has now turned negative, analysts are still bullish for the medium term and do not see that changing if Nifty regains 15,000 and Sensex reaches 51,000. “In such a scenario, we could see 15150/15200 (51600 for Sensex) levels where the market has spent maximum time during the recent fall,” said Shrikant Chouhan, Executive Vice President, Equity Technical Research at Kotak Securities. If Nifty goes below 14,900 and Sensex slips below 50,600, then the pre-budget resistance of 14,750 and 50,150 could be retested, according to Chouhan.

What next?
Till concerns over rising bond yields and inflation ease, stock markets could continue to correct or move range-bound. Further, a spike in coronavirus cases, in some states, has also come back to haunt stock markets.

Sensex and Nifty are likely to continue to keep an eye on global markets for cues. The coming week will also see the third-quarter GDP data be released, which might infuse positivity going ahead. “The strategy should be to buy strong and heavyweight companies between 14850/50500 and 14750/50200 levels with a stop loss at 14600/49750,” Shrikant Chouhan said.