Middle East tension troubles market, but analysts hope calm returns

Indian investors saw their wealth eroded by ₹5.25 trillion on profit booking due to uncertainty in the Middle East, after Iran's overnight strikes on Israel on Sunday. However, the GIFT Nifty was in the green at 22,426.50 at the time of writing, indicating a 154-point bump up for the Nifty at opening on Tuesday, on hopes of de-escalation and an above-normal monsoon. GIFT Nifty trades for 21 hours.

Before this, the Nifty and Sensex fell over a per cent each to 22,272.50 and 73,399.78 as the fear gauge India Vix surged 8.1% to 12.47, the most in two-and-a-half months. The Vix rises when uncertainty increases and vice versa.

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FPIs net sold shares worth a provisional ₹3,268 crore on Monday, while retail investors and high networth individuals (HNIs) trading directly sold ₹768 crore on the BSE (data on NSE was not available). DIIs net purchased shares worth ₹4,762.93 crore.

In addition to cash market sales , FPIs sold index futures worth ₹3,850 crore.

However, despite Monday’s fall, most market analysts believe calm will be restored with global leaders calling for restraint from both sides. They said that rather than being exposed to huge losses, the investor sell-off was due to a desire to protect their profits.

“The events of the past few days in the Middle East are unlikely to have a material impact on Indian markets as we are somewhat insulated from the broader level economic point of view,” said A. Balasubramanian, MD & CEO of Aditya Birla Sun Life AMC. “There will be a bit of uncertainty, but not deep enough for us to be worried. Rather than causing losses, the fall has resulted in profits being reduced as most investors are deep in-the-money.”

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Shankar Sharma, founder of GQuant Investech, agreed. “Additional mini-wars will not have much effect on the markets whether in India or globally. The markets were severely affected by the first war in the last three years which was the Russia Ukraine war. That really crashed all markets including India. But after that the Israel war with Palestine has not caused any fall at all in any market globally including India.

“I do not expect any lasting impact of this recent mini-war because the world has gotten used to wars now and for the markets to fall something very new and very unexpected has to happen.”

Incidentally, Brent crude futures contract traded down 1% at $89.74 a barrel at the time of writing.

In another plus for the market, the India Meteorological Department (IMD) forecast, post markets, that India was likely to experience above-average rains, which could boost investor sentiment amid rising US bond yields, according to Rohit Srivastava, founder, IndiaCharts, as a good monsoon raises rural demand.

While the escalation of geopolitical tensions was a major cause of the selloff in the Indian stock market on Monday, April has been volatile so far for the domestic stock market amid concerns over its rich valuation in the absence of fresh positive triggers. The higher-than-expected US inflation numbers have hit market expectations of a rate cut by the US Federal Reserve in June, strengthening the dollar and bond yields and triggering an outflow of money from riskier equities over the past couple of sessions.

"A level of 22,250 is immediate support to watch out for in the Nifty, while the bigger area of support zone stands at 22,000-22,100,” said Tejas Shah of JM Financial and BlinkX. “On the upside, the immediate resistance for Nifty is at the 22,350 level and the next crucial resistance is at 22,500. Overall, the Nifty is likely to remain volatile within the 22,000-22,500 range in the near term with a negative bias."

The top five stocks which contributed over half of Nifty’s losses included ICICI Bank, HDFC Bank, L&T, TCS and Infosys.