Israel strike on Iran may add to market woes; oil prices remain key

Experts said positive thing from the markets was Iran downplaying the attack by Israel, which was limited to missile and air defence sites and avoided nuclear, oil, and civilian infrastructure sites

Domestic equity markets, already under pressure from a record selloff by overseas funds, are potentially facing a new headwind after Israel hit major oil exporter Iran.

 

Last week, Brent crude jumped 4.1 per cent to $76 a barrel amid a fresh flare-up in West Asia tensions. Experts say any further spike in Iran-Israel tensions and a subsequent rise in oil prices could further hurt sentiment toward domestic equities.

 

Already, the benchmark Sensex and Nifty 50 indices are down over 6 per cent each so far this month.

 

Israel targeted military sites in Iran in the early hours of Saturday, in response to months of attacks by Iran and its proxies in the region. Iran’s military reported that two of its soldiers were killed in the Israeli strikes. 

 

Experts said the positive thing from the markets was Iran downplaying the attack by Israel, which was limited to missile and air defence sites and avoided nuclear, oil, and civilian infrastructure sites.

 

“The attacks seem to be more restrained. However, one needs to see what Iran’s retaliation would be. There hasn’t been anything great about the earnings so far. There is no catalyst for the markets to go up. We might see some relief rally if the tensions in West Asia lessen. But there is no reason for the markets to rise sharply,” said Andrew Holland, CEO of Avendus Capital Public Markets Alternate Strategies. 

 

Global investors are also weighing the impact of next week’s US elections.

 

U R Bhat, co-founder of Alphaniti Fintech, said markets would be more influenced by the US elections than the latest West Asia tensions.

 

“There might be some knee-jerk reaction on opening. ICICI Bank's results were good; since it is an index stock, it can slightly change sentiment. Crude prices shouldn’t go up much as there has been no attack on the oil facilities,” said Bhat.

 

Bhat said the markets had largely priced even the impact of weak earnings and foreign portfolio investor (FPI) outflows from India into China.

 

“When the markets were at a high, there was no scope for earnings disappointment but with markets having corrected by about 7-8 per cent already. Having said that if there are huge disappointments in earnings, markets could plummet further,” said Bhat.

 

Below-expectation earnings from several blue-chip companies have prompted analysts to lower earnings estimates for this financial year and the next. This has led to revised Nifty and Sensex targets.

 

“Given that there is already a negative sentiment and FPIs are selling and now a lot of investors are on the sidelines, even if there is a small selling, it can bring the market down. The earnings were expected to be bad, but it has been worse. We expected revenue to be in single digits, but there has also been margin pressure. There is likely to be a degrowth in profits for many companies,” said Amar Ambani, executive director of Yes Securities. 

 

The Sensex and Nifty logged their fourth straight weekly fall on Friday — their longest losing streak since August 2023. The Sensex last closed at 79,402, while the Nifty ended at 24,181, down from their respective intraday peaks of 85,978 and 26,277. While markets are considered oversold, market players said a further 2-5 per cent drop could occur if FPI outflows don’t slow.

 

So far in October, overseas funds have pulled out at a record pace of over $10 billion from domestic stocks. Much of these funds appear to be moving to China, which has announced a series of stimulus measures to revive its economy.