Rising US yields spark concerns for global equities amid economic uncertainty. What this means for Indian markets

April 26, 2024 / 06:59 AM IST

ndian equities are currently supported by strong economic fundamentals.

Global markets are bracing for potential turbulence as rising US Treasury yields signal economic headwinds amidst mixed data releases. The near 400-point fall in the Dow Jones Industrial Average last night underscored investor nervousness, with concerns mounting over a perfect storm scenario of slower GDP growth and escalating inflationary pressures.

The surge in US 10-year yields to over a five-month high follows the release of data showing an unexpected rise in core Personal Consumption Expenditure (PCE) prices and weaker-than-anticipated GDP growth in the first quarter. Gross domestic product increased at a mere 1.6 percent annualized rate, falling short of economists' expectations of a 2.4 percent rise, while core PCE prices surged by 3.7 percent, surpassing estimates.

Investors reacted swiftly to the underwhelming economic indicators, with the Dow Jones opening sharply lower and the S&P 500 and Nasdaq Composite also experiencing significant declines. Meta, parent company of Facebook, led the tech sector's downward spiral, forecasting higher expenses and disappointing revenue projections, resulting in a 10 percent plunge in its stock price by the end of the trading session. But after market hours, the Nasdaq 100 showed swift gains backed by fantastic numbers posted by Microsoft and Alphabet.

The prospect of stagflation over the US economy appears to be rising, even as rising inflation and lackluster GDP growth fuel uncertainty regarding the US Federal Reserve's interest rate trajectory. But economists say that while the chatter may increase, the strength of the labor market remains a crucial factor to watch. Now, here are the implications of the rising yields for global equity markets.

Yields react to inflation: The unexpected surge in core PCE inflation figures has driven yields higher, indicating that the Fed may delay rate cuts until inflation moderates. This supports a "higher for longer" scenario, contributing to upward pressure on yields.

Sustained yield impact: Higher core PCE inflation suggests that yields will remain elevated until inflationary pressures subside. While short-term spikes may occur, the overall trend is likely to persist until lower inflation numbers materialize.

Stagflation concerns: It is premature to conclude that stagflation is imminent. While recent data points may delay rate cuts, there is not sufficient evidence to show that economic strength and moderating inflation are decisively challenged. Stagflation remains a possibility though.

Impact on global equity markets: While equity markets may experience adjustments on a day-to-day basis triggered by data releases, continued earnings growth are expected to support market resilience.

Impact on Indian equities: Indian equities are currently supported by strong economic fundamentals. Guesswork around election will be a key driver for market while earnings for the quarter will dictate stock-specific moves.

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