Domestic equity benchmarks Sensex and Nifty 50 are trading lower on Wednesday as a fresh escalation in the Middle East conflict had Brent crude flirting with $110 per barrel, a pain point for the world's third-largest crude oil importer.
The Nifty 50 fell as much as 1.05% to 23,231.40 and the BSE Sensex lost 0.99% to trade at 74,160.16 as of 10:15 am.
Most sectors are trading in the red, with Realty down 4.2%, followed by Metal and Consumer Durables.
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Three factors are weighing on domestic equities: rising crude oil prices amid escalating US-Iran tensions, weakness across key sectors, and continuing selling pressure in the benchmarks.
Rising crude prices
Brent crude extended its rally towards $109 a barrel as fighting between Iran-backed Houthi militants and Saudi-backed forces intensified in Yemen, adding another threat to Middle East oil flows already disrupted by the wider US-Iran conflict.
Brent futures rose after gaining more than 6% in the previous session, while West Texas Intermediate traded around $103. The global benchmark has surged nearly 30% from its early-August lows and is on course for its strongest weekly gain since July.
The latest escalation centres on the Bab el-Mandeb Strait, a key shipping chokepoint linking the Red Sea with the Gulf of Aden. Houthi forces seized the Yemeni port city of Mokha on Thursday and advanced towards strategic islands, according to military sources, strengthening their position near the strait.
US bond yields are nearing 5%
The sharp rise in US Treasury yields is making investors increasingly nervous about interest rates. The US 10-year Treasury yield climbed close to 5%, its highest level in nearly three years, after US producer-price data added to concerns that inflation may remain sticky.
Higher bond yields make equities relatively less attractive and raise the cost of capital for companies. More importantly for emerging markets such as India, the prospect of higher-for-longer US rates can encourage global investors to shift money towards US fixed-income assets.
Markets are now also pricing in a greater possibility of a Federal Reserve rate hike next week, adding to the risk-off mood.
Global risk-off trade is spilling into India
The Indian market is not falling in isolation. US stocks declined for a fourth straight session overnight, with the Dow and S&P 500 down 0.6% each and the Nasdaq losing 0.65%. Asian markets saw sharper losses, with Japan's Nikkei and South Korea's Kospi among the major indices falling more than 2%.
The combination of higher yields, inflation worries and escalating US-Iran tensions has pushed investors into a more defensive mode.
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