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Wednesday, April 21, 2021

Explained: Why US stocks logged their best day since June 5, and will it have a rub-off effect on Indian stocks and bonds?

The benchmark S&P 500 index in the US logged its best day in nearly nine months on Monday (March 1), as shares surged sharply to ensure a 2.4 per cent gain in the broad stock index. Would there be an India impact?

Written by Anil Sasi , Edited by Explained Desk
New Delhi | Updated: March 2, 2021 2:34:55 pm
In this photo provided by the New York Stock Exchange, traders work on the floor, Monday, March 1, 2021. (Courtney Crow/New York Stock Exchange via AP)

The benchmark S&P 500 index in the US logged its best day in nearly nine months on Monday (March 1), as shares surged sharply to ensure a 2.4 per cent gain in the broad stock index — its biggest single-session surge (in percentage terms) since June 5.

The Dow Jones Industrial Average was up nearly 2 per cent, while the tech-heavy Nasdaq Composite surged 3 per cent. The gains recorded by all three benchmark US indices came after significant declines registered most of last week.

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Why the surge?

The primary reason was that the surge in government-bond yields, visible through much of last week, seemed to have tapered off. This allayed investors’ concerns over a potential rise in interest rates.

A rise in interest rates makes bond prices fall and bond yields surge — and falling interest rates cause bond prices to rise and yields to fall. The yield on the 10-year US Treasury notes, the benchmark borrowing cost in the American debt markets, slipped sharply.

How does this impact the equity markets?

There is generally an inverse relationship between bond yields and stocks — when bond yields rise, equity market returns take a hit; while declining bond yields tend to impact equity markets positively.

This is because when bond yields go up, investors start moving exposure away from equities, and into bonds. Equities become less attractive, given that bonds, with assured returns, are safer investments.

But when yields stall, or fall, a reallocation of the investor portfolio happens, triggering a potential shift back in favour of equities, which are riskier but carry higher returns.

Also, when bond yields surge, the cost of capital for companies goes up, impacting the valuations of their stocks. When the reverse happens, it is good for companies that plan to borrow from the market.

Would there be an India impact?

Most likely yes, at least in the short run.

The surge in bond yields in the US over the past week has had a cascading impact in India, resulting in negative valuations on other asset classes, especially stocks. The yield on 10-year bonds in India moved up from the recent low of 5.76 per cent to 6.2 per cent, broadly in line with the rise in US yields.

This had an impact on the India bourses, with the benchmark BSE Sensex falling 2,300 points last week. A reversal of the trend in the US could have a positive effect.

On Monday (March 1), domestic equity market benchmarks BSE Sensex and Nifty 50 ended over 1.5 per cent, and were trading higher in morning trade on Tuesday (March 2).

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