Sensex swings 1,200 points on inflation fears

Rising crude oil prices, bond yields hit sentiment

India’s benchmark indices fell on Tuesday amid rising bond yields and crude oil prices. The Sensex plunged as much as 1,242 points from the day’s high before recouping more than half the losses in the last hour of trade. The index ended the session at 59,667 with a loss of 410 points, or 0.68 per cent. The Nifty, on the other hand, closed at 17,748, dropping 106 points, or 0.60 per cent.

Rising crude oil prices have stoked inflation worries. Brent crude oil, a benchmark for over three-quarters of the world’s traded oil, was hovering near $80 a barrel — the highest level since October 2018. Some analysts have predicted that it could hit $90 a barrel by the end of the year.

“Crude oil above $80 is a negative for the economy. Because of our import bills, the rise in crude oil prices will negatively impact public finances and inflation. Moreover, the markets have priced in the best outcome in earnings, public finances, and interest rates. Any negative news could shock the markets as it happened today,” said U R Bhat, co-founder and director, Alphaniti Fintech.

The 10-year US bond yield was at 1.52 per cent on Tuesday, the highest in three months. The yield rose after investors started to price in the US Federal Reserve’s decision to reduce monthly bond purchases as early as November. On Monday, US Federal Reserve Chairman Jerome Powell said the inflation test for tapering Fed’s bond purchases had been met.

The prospect of interest rate hikes by central banks of major western economies is also worrying investors. On Monday, the Bank of England's chief said there was a growing case for hiking interest rates. The Norges Bank, of Norway, recently became the first major western central bank to raise interest rates since the onset of the Covid-19 pandemic.

Concerns that the ongoing energy crisis in China could impact its economic growth further hit investor sentiment.

Goldman Sachs on Tuesday lowered its economic forecast for China. The power crisis has hit millions of homes and halted production in factories, including suppliers to firms like Apple and Tesla.

The crisis is attributed to disruptions in coal supply due to the pandemic, emission targets, and a drop in imports amid a dispute with Australia. Investors are also monitoring developments in Evergrande.