A financial market is a broad term. It includes everything from equities, bonds and commodities. Derivatives in all asset classes add another layer to the financial markets system worldwide.
Money moves from one market to another as investors look to make the most of the price differential. The action of investors dictates the movement of the capital they mandate such a move. The scope expands not only from one asset class to another but also from one country to another.
The United States of America dominates the world financial system. Financial markets in that country are comparable to no other market in size and expanse. You can quickly move millions and billions of dollars in and out of the American stock market, bond market, commodities exchanges, or derivative markets.
While the rest of the world is packed into regions by investors, the United States financial markets get special treatment by institutional and individual investors worldwide. The value of money traded runs into hundreds of trillions of US dollars.
Bond market trigger
The dramatic slump in stock markets worldwide and India last week was triggered by something called the US treasury bond-yield spike. The 10-year US treasury bond yield surged to the highest level in 10-years.
When financial market conditions are benign and demand for credit is low, bond-yields remain stable as there is an abundant supply of money. However, the jump in yields indicates that investors are nervous. They are unwilling to agree with the US Federal Reserve's plan to keep key borrowing rates near zero.
Equity, bond and commodity markets around the world witnessed a dramatic selloff last week. Oil prices, gold prices and stock market indices took a nosedive as money moved to safe-haven assets such as cash or bonds. International investors adopted a risk-off approach to risky assets and emerging market assets are considered risky.
Last week, shares in Korea, Taiwan, India and many other markets fell. According to the stock market data on institutional trades reported on Indian stock exchanges, a fund managed by Vanguard, a US-based index-investing company, sold a chunk of Indian equities in bulk quantity.
That must have happened in many markets. Foreign portfolio investors control a sizeable chunk of shares of large companies. In markets like India, they own 20% of the value of shares listed on stock exchanges. When globally, investors decide to sell shares, it would have an impact across markets like India.
What can you do
If you are an investor waiting on the sideline, such situations open doors for you. If you read major companies’ commentary after the quarterly results announced for the quarter ended December 2020, you will hear optimism.
Most managements of large companies are confident about a recovery in the economy and the business. Analysts tracking most sectors predict a sharp rally in corporate profits for the years ending March 2022 and March 2023.
In such a situation, holding on to Indian shares makes more sense than selling. Share prices may fall further if the selloff from foreigners continues. However, at some stage, you may want to start accumulating quality company shares. If you are investing regularly through systematic investment plans, you must not withdraw your money in panic.
That could be a terrible thing to do as stock markets move in cycles. Your next month’s investment will buy you more units of the fund or stock as prices fall. Staying invested and riding through this selloff could do a lot of good to your long-term financial goals. Bond yields in the US spiked and created havoc across world markets. They spiked in India too. However, the key to all of that is inflation in the economy.
The risk of inflation is muted over the next year if you read the minutes of the RBI’s monetary policy committee meeting. However, members have flagged spikes in oil prices and food inflation as short-term risks.
The RBI committee that sets key borrowing rates has maintained an 'accommodative' credit policy stance. That means a spike in borrowing rates is unlikely even if inflation rises in the short-term. Your fixed deposit investments are likely to remain where they are. Banks are in no hurry to pay any higher interest rates as they have currently have surplus money.
4.24 per cent dive in markets due to US bond yield spike
Since February 25, the Indian stock markets have fallen over 4 per cent primarily due to the 10-year US treasury bond yield surging to the highest level in 10-years. This generally indicates a loss of confidence among investors and resulted in a risk-off approach that saw emerging markets take a hit
(The author is editor-in-chief at www.moneyminute.in)