Indian share markets continued their momentum during closing hours and ended the day on a positive note. Gains were largely seen in the metal sector and oil & gas sector.
At the closing bell, the BSE Sensex stood higher by 386 points (up 1.1%) and the NSE Nifty closed higher by 125 points (up 1.2%). The BSE Mid Cap index ended the day up by 1.8%, while the BSE Small Cap index ended the day up by 1.9%.
Asian stock markets finished on a positive note as of the most recent closing prices. The Hang Seng was up 1.58% and the Nikkei was trading up by 0.15%. The Shanghai Composite stood higher by 2.16%.
The rupee recovered from its all-time low witnessed yesterday and was trading at 68.48 to the US$ at the time of writing.
Oil & gas stocks were witnessing buying interest today. Among the top gainers from the oil & gas sector were GAIL share price (up 6.7%), Petronet LNG share price (up 5.9%), and Indraprastha share price (up 4.1%).
In the news from the banking sector, IDBI Bank share price was in focus today. Shares of the company witnessed buying interest on reports that LIC finalized the deal with the lender, which will allow an infusion of Rs 130 bn in the bank.
As per a leading financial daily, the board members of Insurance Regulatory and Development Authority of India (IRDAI) are likely to meet today, wherein they may clear the deal between IDBI Bank and Life Insurance Corporation of India (LIC).
The development comes as the approval from IRDA is mandatory for insurers to invest over 15% in listed companies. As of March 2018, LIC held 10.8% in IDBI Bank. The board is likely to grant an exemption to LIC for taking over 15% stake in the bank and then LIC may be allowed to buy additional 30% stake, taking its shareholding in the bank to over 40%.
At the closing bell, IDBI Bank share price stood up by 10.4% on the BSE.
Bond yields edged lower today, on sustained demand from corporates and banks.
However, gains remained capped as market participants remained cautious ahead of a weekly auction of notes today and as state governments plan to raise a higher amount of funds through bonds in the second quarter of this financial year.
In the global market, US Treasury yields edged higher on Thursday but held near one-month lows as fears about trade wars harming global growth kept up demand for safe-haven bonds, while month- and quarter-end rebalancing added to bond buying.
Furthermore, oil prices fell amid concerns about trade frictions between the United States and other major economies, although crude market conditions remain tight due to supply disruptions and generally high demand.
Back home, the yields on new 10-year Government Stock were trading 5 basis points lower at 7.9% from its previous close of 7.9% on Thursday.
The benchmark five-year interest rates were trading 2 basis points lower at 7.96% from its previous close of 7.98% on Thursday.
Note that, the earnings yield of the market vis-a-vis risk-free 10-year government bond yield is a very important indicator for equity markets.
The earnings yield is calculated as the net profit for the last 12-month period, divided by market capitalization. In other words, it is the inverse of the PE Ratio.
This ratio can be used as a tool to identify how cheap or expensive the stock market is relative to the debt market, other any other possible investments.
The chart below illustrates the same:
The Gap Widens Between Bonds and Stocks
Lately, the divergence between bond yields and earnings yield has increased. This means stocks have become expensive compared to bonds.
Historically, there is a negative correlation between stock prices and the spread of bond yields over earnings yields. The bond yields are now higher by 364 basis points (bps), compared to the average earnings yield of the BSE Sensex.
With this, we at Equitymaster believe that the equity market might see more selling in the coming weeks, as there is still a large gap between the yield on the 10-year government bond and corporate earnings yield.
Comments
Log in or sign up to join the conversation.