Bear run: Stocks sell off on concerns of rising input costs, yields

Stocks fell sharply on Monday, the fifth straight day of fall, with investors taking risk off the table on worries of soaring commodity prices, rising bond yields and a fresh wave of Covid-19 infections. Bonds also sold off as prices of crude oil stayed elevated and investors remained apprehensive after an auction last Thursday met with lukewarm response.

The breadth of the fall in the equities markets, post a huge liquidity-driven rally, suggests markets could be headed for some consolidation as the tailwinds from the Budget proposals and good corporate results in Q3FY21 recede. Nonetheless, foreign flows into equities are nudging a strong $4 billion in February so far on the back of net flows of $2 billion in January.

There’s concern on higher commodity prices with analysts at BofA Global Research highlighting on Monday the markets had largely ignored the sharp increase in prices of several commodities of as much as 75% since June 2020. The commodity risk had found a distinct mention in most corporate commentaries, they observed. “Inventories – typically between 17-85 days – have so far cushioned the impact of the price spurt. However, these benefits are now behind,” they noted.

Bonds also sold off on Monday with investors apprehensive after an auction last Thursday met with lukewarm response. The yield on the benchmark was up seven basis points at 6.20% having climbed 14 bps last week. There are concerns the yield could trend higher as the government borrows large sums in fiscal FY22; foreign flows were negative n January and continue to stay that way in February. US Treasury yields have been rising in the US with bonds seeing a big sell-off last Friday; ten-year yields are nudging 1.4%.