Rising crude prices may take shine off equities

Analysts warned that the sharp rise in crude prices could lead to sustained global inflation much longer than anticipated and hasten the end of super-cheap money. Commodity inflation also poses a threat to the revival in corporate earnings.

Dhananjay Sinha, managing director and chief strategist, JM Financial Institutional Securities Ltd, said a combination of tapering and rising crude oil prices can challenge the assumption that an inflationary environment will not be worrying. “The market has taken a benign view on the US Federal Reserve’s decision to initiate tapering from November and following it up with normalization of its ultra-easy money policy stance. The downside risk for this benign outlook can arise if inflation remain high. From India’s standpoint, hence, the outlook on crude oil can be very crucial,” he said.

Goldman Sachs has raised its forecast for Brent crude to $90 a barrel by the end of 2020 on the back of faster-than-anticipated fuel demand recovery, despite the Delta variant of SARS-CoV-2 and Hurricane Ida impacting production in the US, which impacted global supplies.

Vinod Karki, head, strategy research, ICICI Securities Ltd, said the rise in commodity prices in September continued to be a risk to the inflation trajectory. However, the stock market resilience reflects strong investor sentiment driven by expectations of a strong cyclical economic recovery as the threat of a third covid wave appears less likely, while the vaccination rate in India picks up pace. “As capital markets go beyond liquidity support from central banks, investor focus is shifting towards growth revisions, which has a huge underpinning on how the investment cycle pans out,” Karki said.

Despite the US Federal Reserve hinting at increasing policy rates, and the Evergrande crisis in China, Indian markets have been hitting record highs in September. On Monday, the markets hit record high during the day, but remained mostly range-bound. The BSE Sensex ended at 60,077.88, up 29.41 points, while the Nifty closed at 17,855.10, up 1.90 points.

Gaurav Dua, senior vice president, head, capital market strategy, Sharekhan by BNP Paribas, said a combination of rising energy prices, China issues, and taper tantrum could trigger the much-needed breather in the equity markets that should be used to accumulate quality stocks. “In terms of market outlook, the valuations are not cheap anymore and a pullback after such a strong all-round rally would be healthy. We do not expect any large correction in the Nifty or the Sensex, but the broader markets are ripe for a deeper correction,” he said. “Rising inflationary expectations, if they are driven by demand rather than supply-side issues, could be worrying. Most central banks, including RBI, have maintained that the rise in inflation is transitionary and would moderate in the coming quarters. That’s the reason why RBI decided to maintain status quo on policy rates despite retail inflation surging to higher than the comfort level of 6% earlier this year,” he said.

Reuters contributed to the story.