What kind of situation can be seen in the stock market on Wednesday?Image Credit source: Google Gemini
The two-week ceasefire between Iran, America and Israel ended on Tuesday. In such a situation, Indian markets are reaching an important phase, where the next movement of crude oil can decide the direction of equity, currency and bond yields. Since the ceasefire, Indian markets have already seen tremendous growth. During this period, Nifty has increased by about 1,000 points. This recovery comes after a huge decline following the conflict that started in late February.
However, now this bullishness is going to be put to a new test, because with the end of the deadline, uncertainty has returned again. Iran has accused America of not being serious about diplomacy and has alleged violation of the ceasefire, while the proposal for another round of talks in Pakistan still remains uncertain. Meanwhile, its impact on crude oil prices has started becoming visible. Due to increasing tension around the Strait of Hormuz, prices have increased by about 6 percent.
For the markets, the outcome of the ceasefire will matter less as a geopolitical incident but more in terms of its direct impact on oil. The continuation of the ceasefire or signs of easing of tension can provide immediate relief to all types of asset classes. Analysts believe that as the 'risk premium' (risk allowance) related to the Strait of Hormuz reduces, crude oil prices will also soften.
What will happen if the tension is reduced?
Vipul Bhowar of Waterfield Advisors said in an ET report that if the tension eases, crude oil prices may fall to the range of $ 85-90 per barrel. This will help in reducing inflationary pressure and will also strengthen the rupee. Due to low oil prices, RBI will also get more flexibility in terms of interest rates.
In such a situation, equity markets can extend their recent gains further. Paresh Bhagat of Veer Growth Fund said in the ET report that if the trend of easing of tensions continues, then the markets may see a short-term rise of about 2-3 percent. This will happen because macro-economic stability will improve and risk appetite among investors will return.
What is the second situation?
The recent rally in Indian equity markets indicates that investors have already built their positions in anticipation of some degree of stability. If the market remains calm, this trend will strengthen further and the markets will move closer to their previous highest levels. There may also be a middle path, in which talks continue but no concrete results emerge. In such a situation, there will be fluctuations in the market, but no definite direction will be decided.
In the media report, Bhowar said that in such a situation, crude oil prices can remain roughly in the range of $ 95-105 per barrel. This would indicate that there is uncertainty in the market, but there is no major supply shock in the oil supply. Bhagat further said that unless there is a sudden sharp rise in crude oil prices, the Indian equity markets have been showing resilience despite geopolitical movements.
What does the recent pattern say?
Recent trading patterns also confirm this. Even when bad news was coming, the markets did not see much decline. Investors were paying more attention to the strength of domestic earnings and valuations. Bonanza's Balaji Rao ET reports that despite the initial fall during the conflict, markets recovered quickly. The strong performance of companies and the improving environment contributed to this. He said that instead of reacting to headlines, investors should keep an eye on crude oil prices as the main signal.
If war starts
The biggest threat to the markets is what will happen if war starts again between the two sides? In such a situation, crude oil prices may increase rapidly. Indications of which have already been found. If supply routes like the Strait of Hormuz are disrupted, prices may cross $100 per barrel. For India, which imports most of its crude oil needs, this will have immediate economic consequences. Due to increase in oil prices, current account deficit will increase, rupee will weaken and inflation will increase. This will increase the possibility of further tightening of the monetary policy by the Reserve Bank (RBI).
Initially, a 'risk-off' response may be seen in the stock markets. Bhagat estimates that the market may fall by about 300-400 points in a short time. However, whether this will cause much loss or not will depend on how long oil prices remain at high levels. Bhowar also warned that if crude oil prices continue to remain at high levels, the RBI may have to adopt a more stringent stance. Due to this, the process of reducing interest rates may be postponed and pressure on economic growth may increase.
focus again on oil
In all possible scenarios, one thing always remains the same: the market reaction will be determined more by which direction crude oil prices go than just geopolitical headlines. Indian markets have already proved this connection in the last two months. When the conflict escalated, the initial selling in the market was mainly due to supply disruptions and fear of rising oil prices. The recovery that was seen after this happened because these fears had reduced somewhat during the ceasefire talks.
Investors may remain cautious on Wednesday. They will decide their investment strategy not only on the basis of the outcome of the talks, but also on the basis of their expectations related to oil prices. For now, the 1,000-point rise in Nifty reflects hope that perhaps the worst is over. How true this expectation will prove to be will depend on how the situation changes in the next few days.
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