At a time when Indian markets are at all-time highs, bulls could find themselves caught in the crossfire due the escalation in tensions between Iran and Israel this week. The risk of a broader conflict in the Middle East after Iran’s attack on Israel on Saturday may trigger volatile swings in equity market, as rising crude oil prices could unnerve investors. In addition, there are chances that investors may seek to book some profits and take some risk off the table.
Iran fired over 300 drones and missiles towards Israel on Saturday night, in response to an alleged Israeli strike on its consulate in Syria which killed several people, including 2 Iranian army generals. Though Israel, along with its ally US, successfully intercepted most of these drones and missiles, limiting the overall damage, any potential Israeli reaction to the attack could lead to the conflict spreading beyond Iran and Israel.
With the price of Brent crude already hovering over $90 per barrel, this fresh escalation has raised fears that the oil prices may inch closer to $100/barrel. This would not bode well for emerging markets equities, particularly India, as it imports much of its crude oil needs.
Shrikant Chouhan, executive vice president and head of equity research at Kotak Securities, said the Nifty 50 may move closer to its support level of 22,000 points in the current scenario. This would mean over 2% decline from the current value. However, Chouhan said if Brent Crude surpasses $95 per barrel, then the downside could be higher.
However, other like GQuant’s founder Shankar Sharma aren’t too worried. He said the markets have grown comfortable with wars and inflation worldwide. He expects the fresh tensions in the Middle East to only have some temporary impact.
Over the last several years, equities have seen volatility in the initial trading sessions after major conflicts and wars. The extent of the impact has largely depended on the conflict’s impact on crude oil prices.
Brent Crude oil rose 7.5% in a week after Israel attacked Gaza, while Russia-Ukraine war saw crude oil prices surge 11.5% in a week. On both these occasions, Nifty 50 and Sensex saw sharp swings and gave muted returns, while demand for safe havens like gold increased.
“Iran informed the United Nations on Sunday that the matter is now “concluded”. Although the global index futures saw a dip on Sunday evening, we can expect the markets to remain stable as long as there are no further escalations from either side, particularly Israel,” said Dhiraj Relli, MD and CEO of HDFC Securities.
Nevertheless, investors will closely monitor crude oil prices and US bond yields going ahead. Apart from fuelling inflation worries, higher crude oil prices could also delay any potential rate cut by the US Federal Reserve.
Last week, after data showed that inflation in the world’s largest economy was hotter-than-expected, foreign institutional investors turned sellers in the market, as it raised concerns that the Federal Reserve may not cut interest rate in June meeting. Consequently, both Sensex and Nifty 50 ended nearly 1% lower at 74,244.90 points and 22,519.40 points, respectively, on Friday.
“As per the latest development, it seems the tension is not escalating further. Market is keenly tracking the development from the perspective of impact on crude oil prices. If crude oil spurts, then the market can react negatively,” said Sunny Agrawal, head of fundamental equity research at SBICAPS Securities.
Agrawal believes market may react marginally negative in the opening trade on Monday and then recover during the second half, if the situation remains stable in the Middle East.