Markets Next Week: Bond Yields Would Be The Key

Equity investors the world over are increasingly watching the movement of the US Treasury Bond yields. Indian markets, which were trading in the positive on Friday, suddenly moved into negative territory as bond yields once again in the US rallied.

Equity markets closed on a negative note after the US Treasury bond yields inched up during the day. Nifty lost 144 points (-0.95%) to close at 15,031, while Sensex lost 487 points (-0.96%) to end at 50,792.

"European shares too slipped from a one-year high as a rise in U.S. Treasury yields fueled an exit from risk assets. The yield on the benchmark U.S. 10-year Treasury note rose again on Friday morning in the aftermath of the stimulus passage, hitting 1.6%. Germany Index declined half percent while France and UK Index marginally decline. On the domestic side, Nifty opened gap up led by positive global cues but came off by afternoon on the back of weakness in index heavyweights. Banking & financials, FMCG, metals and pharma stocks came under major selling pressure," Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services Ltd said in a post market commentary

According to him, technically, Nifty has to decisively hold above 15000 zones to witness an up move towards 15200 and 15300 zones while on the downside immediate support exists at 14900 then 14800 levels.

"Bank Nifty has to continue to hold above 35500 zones to witness an up move towards 36000 and 36500 zones while on the downside support exists at 35000 then 34750 levels. India VIX inched up by 4.6% and closed at 21.71 levels. Cool down in VIX below 21-20 zones is required for bullish grip and smoother move in the market," he noted.

Fears of inflation to be a dampener

There are worries that there could be a rally in commodity prices and hence inflation. Next week, Indian markets would react to the IIP and retail inflation data.

Retail inflation surged to 5.03% in Feb, the highest in three months. "It is a worry on both fronts, CPI after staying at 4% level for 2 months has risen to over 5% in the month of February. The rise in inflation is on account of elevated food, vegetable prices, core inflation at 5.88% is a concern. The rising crude price and its impact on retail fuel prices are a risk to inflation going forward," said Mr. Nish Bhatt, Founder & CEO, Millwood Kane International, an investment consulting firm on CPI & IIP data.

However, analysts remain optimistic on the long term prospects of the markets. "While the long term structure of the market continues to remain positive, we believe that markets may face some hurdles in the near term till the concerns over the rising bond yields, commodity prices and risk of increase in inflation recedes. Investors would look for cues from global markets and Institutional flows which has been patchy for last few days. Volatility is likely to remain as market would look at global cues for further direction," says Khemka.

Markets have rallied significantly in the last few months and investing at higher levels always pose a risk. Investors should hence tread with caution.