The Indian stock market slipped into the deep red on Monday, with the Sensex and Nifty falling around 1% each as soaring oil prices and bond yields, amid the escalating Iran-US conflict, spooked investors.
The Sensex plunged over 900 points to trade below 73,000, while the Nifty 50 dropped more than 250 points to slip below 22,900 level. The sharp sell-off wiped out nearly Rs 6 lakh crore from the total market capitalisation of BSE-listed companies, bringing it down to around Rs 476 lakh crore.
All 30 constituents of Sensex traded in the red, with Bajaj Finance, Kotak Mahindra Bank and HDFC Bank shares falling nearly 2% each to lead losses on the benchmark index. Bajaj Finserv, Hindustan Unilever, BEL, M&M, L&T, Eternal, ICICI Bank, Titan and a few other stocks fell more than 1% each.
The selloff was broadbased, with Nifty Smallcap 100 and Nifty Midcap 100 indices falling more than 1% each. India VIX, which measures volatility in the market, rallied nearly 13% to near 14.
All sectoral indices traded in the red, with Nifty Auto, Nifty Financial Services, Nifty FMCG, Nifty PSU Bank, Nifty Metal, Nifty Private Bank and Nifty Realty dropping over 1% each. The overall market breadth turned strongly negative, with NSE seeing 2,259 declines against 759 advances, while 116 stocks remained unchanged.
Here are the key factors pushing the market down today.
1) Iran-US conflict escalates
US President Donald Trump rejected Iran's proposal for a seven-day ceasefire and reopening of the Strait of Hormuz. Speaking to reporters on Saturday, Trump forcefully stated, "I reject this agreement. They want an agreement to be made under which the Strait of Hormuz is immediately opened, because they are severely failing.”
Meanwhile, Iranian President Masoud Pezeshkian said that Iran will remain resolute and not retreat in the face of the United States and Israel. “We stand firm with strength, we are at the service of our people, we will stand until our last breath, and we promise that as long as we have life in our bodies, we will be honest servants to the people; you have put us to shame, I do not consider myself worthy of your presence, I am your servant,” he said.
With the Iranians holding firm in the face of Trump's threat of annihilation and his rejection of the peace deal may have spooked investors who will keenly watch developments in the oil-rich Middle East.
2) Oil prices jump
As a result of the latest developments in the Middle East, oil prices jumped 2% to near $107 per barrel as market priced in further disruption in oil shipments. Brent crude futures were trading near $107 per barrel while WTI Crude futures traded close to $94 per barrel.
JPMorgan said it had lost visibility on the direction of oil prices and, for the first time since the Iran war began in February, no longer had a clear baseline scenario for the market. The bank said escalating tensions were adding to concerns over an already worsening supply shock.
"We simply don't know how to model the endgame," JPMorgan analysts said, pointing to the uncertainty over how the conflict could evolve. When the conflict began, the bank had assumed there were economic thresholds that the US administration would not cross. Six months into the war, JPMorgan said, many of those thresholds have been crossed, while there remains no clear exit strategy.
3) Bond yields soar
Bond yields continued to soar to fresh multi-year highs, further putting pressure on equity markets. The yield on benchmark US 10-year Treasury notes surged further above 5.2%, highest since 2004. The 30-year US bond yield jumped above 5.5% while that on the two-year notes, which moves in tandem with Fed rate hike expectations, rose above 4.9%.
Soaring bond yields typically make debt markets more attractive to investors, which in turn puts pressure on the riskier equity markets. Bond yields move inversely to bond prices, so the soaring yields reflect a sharp selloff in bonds.
4) Rupee tumbles
The Indian rupee dropped 14 paise to 95.89 against US dollar in early trade. Forex traders are now fearing the Indian currency crossing the key psychological mark of 96 against the American greenback as it continues to face headwinds from higher oil prices, rising US Treasury yields and a firmer dollar.
“Volatility in crude and gold, along with a rise in the dollar, limited the rupee’s ability to sustain gains. Going ahead, currency movement is likely to remain range-bound amid global commodity and dollar volatility. Rupee range can be seen between 95.50-96.50,” said Jateen Trivedi, VP Research Analyst - Commodity and Currency, LKP Securities.
5) FII outflows
Foreign investors remained sellers of Indian equities on Friday, net selling shares worth Rs 3,694 crore, according to provisional data on NSE. The trend of FPI flows turning negative after positive inflows in July and August was evident early this month, said VK Vijayakumar, Chief Investment Strategist at Geojit Investments. He noted that this trend has sustained and the total equity outflows through exchanges have touched Rs 25,682 crores this month so far.
6) Weak global cues
Dalal Street is accompanying most of its Asian peers today which traded in the red amid the soaring oil prices. South Korea’s Kospi dropped over 2% while China’s Shanghai Composite fell over 1.7%. Japan’s Nikkei recorded muted gains.
What lies ahead for Dalal Street?
Two apparently contradictory trends in the economy and markets deserve attention, according to V K Vijayakumar, Chief Investment Strategist, Geojit Investment. He noted that the economy is resilient and corporate earnings are improving, but the market is steadily going down. This is a case of external headwinds overpowering domestic tailwinds. Brent crude at $106 and the US 10-year yield at 5.2% are strong headwinds that are weighing on markets, the analyst noted.
He added that FPIs, after turning buyers in July and August have again turned sellers in September. This scenario will keep the market under pressure in the near-term. “From the market perspective an important trend is that even though FPIs are sellers in large-caps, they continue to buy mid-and small-caps despite their elevated valuations. The broader market is where the momentum is. This is likely to be a short-term phase,” according to the analyst.
The valuation differential between large-caps on one side and mid-and small-caps on the other, will not last long, and a reversion to mean is inevitable, Vijayakumar said. This will happen only when crude and US bond yields cool, he noted.
Technical view on Nifty
Technically, the bias for Nifty is neutral-to-cautious, and the undertone stays subdued as long as the index trades below 23,300, said Hemang Gor, Senior Research Analyst on Derivatives & Technical Research at Axis Direct. He saw the index finding immediate support at 23,000, and a decisive break would expose 22,800. Notably, the index has already broken the key support level.
“With the September series expiring Tuesday, volatility could remain elevated. However, any progress on Hormuz talks could ease crude and help the index recover towards 23,300–23,450,” the analyst said.
Disclaimer: This article has been written by Debaroti Adhikary, who is not a SEBI-registered Research Analyst or an Investment Adviser. Debaroti Adhikary and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.
