Indian equity benchmarks extended losses for the second straight session on Thursday as rising Covid cases in China alarmed investors who had anticipated the world's second-largest economy to pick up steam following the easing of strict restrictions.
After closing marginally lower in the previous session, the BSE Sensex index fell 300.33 points to 60,609.95 in early trade on Thursday, and the broader NSE Nifty index opened in the red, reflecting a fall in wider Asian share markets along with oil prices.
As traders try to settle their futures and options (F&)) contracts for the December derivatives, the last series of 2022, the expiry on Thursday could cause a spike in volatility.
"Markets are likely to see a bearish opening on Thursday in view of weak global cues after US markets slumped overnight amidst rising bond yields over fears that inflation could pick up on China's reopening," said Prashanth Tapse, Senior Vice President For Research at Mehta Equities.
"Volatility is likely to be the hallmark for the day as traders roll-over December F&O contracts to January," he added.
The broader MSCI index of Asia-Pacific shares, barring Japan, was down over 1 per cent and on track to post losses for the third consecutive week.
Markets have remained muted due to worries that measures by central banks to manage inflation could cause an economic downturn and the uncertainty around how China's economy will perform after the easing of Covid restrictions have also weighed on risk assets, with Wall Street shares ending in the red overnight.
Since Beijing began dismantling its zero-COVID policy at the beginning of the month, its healthcare sector has been under much strain.
On a light trading day, equity indexes in South Korea, Australia, Hong Kong, and Japan fell by more than 1 per cent.
After the S&P 500 index dropped 1.2 per cent to its lowest level in more than a month, futures contracts for European equities declined while those for the S&P 500 see-sawed between gains and losses.
After a terrible year for the financial markets, optimism was dampened in the final trading week of 2022 by the possibility of additional pandemic damage to weak supply chains as central banks struggle to manage inflation.
A worldwide bond index has fallen 16 per cent, while global equities have lost a fifth of their value, the biggest annual loss since 2008. The US 10-year yield has risen from 1.5 per cent at the end of 2021 to above 3.8 per cent due to the dollar's 7 per cent increase.
China's reopening "complicates the Fed's job with respect to putting a little bit of a bid under oil prices, putting a little bit of a bid under inflation globally, to aggregate demand," said Sameer Samana, Senior Global Market Strategist for Wells Fargo Investment Institute, on Bloomberg TV.
"That's going to be one of the biggest things that we'll be watching in the first half," he added.
As the number of COVID-19 cases in China increased, there was less optimism for a rebound in fuel demand in the second-largest oil consumer in the world, pushing crude prices lower.
That crude price fall could cap the domestic shares losses as India depends on imports for over 85 per cent of its oil needs.