Sensex falls 500 points, Nifty slips below 24,100 as US-Iran conflict escalates. What lies ahead?

Sensex dropped more than 515 points to 77,096.34, while Nifty 50 dropped 146 points to 24,064 during Tuesday’s session. The broader market also edged lower, with Nifty Smallcap 100 and Nifty Midcap 100 indices dropping up to 0.5%.

HCL Technologies, IndiGo, Bajaj Finance, L&T, Bajaj Finserv, UltraTech Cement, M&M, Kotak Mahindra Bank and HDFC Bank shares were the top losers on Sensex, falling 1-3%. Tata Steel, TCS and Infosys shares meanwhile rose nearly 1% each.

The downtrend comes as India VIX, which measures volatility in market, inched slightly higher to 13.39 on Tuesday morning. Nifty Financial Services was the worst hit, crashing 1%. Nifty IT, Nifty Metal, Nifty Pharma and few other sectoral indices however were trading in the green with marginal gains. The overall market breadth was bearish, with NSE seeing 1,608 declines and 780 advances, while 139 stocks remained unchanged.

US-Iran conflict escalates

The conflict between US and Iran continued to escalate further, after the former conducted fresh strikes against the latter. This came after Iranian forces struck a commercial ship in the Strait of Hormuz early on Sunday, before announcing closure of the critical waterway that accounted for 20% of daily global oil and gas supply shipments before the war. Following the fresh strikes oil prices rose sharply higher, with Brent crude futures jumping around 2% to trade near $85 per barrel while WTI Crude futures rose to $80 per barrel.Rupee weakensAs a result of the rising oil prices, rupee dropped past the 96 per dollar mark for the first ‌time since ⁠late ⁠May. The ⁠rupee fell nearly 0.5% to 96.0775, its weakest level since May 22. “The renewed escalation in US-Iran tensions also supported the US dollar, keeping pressure on emerging market currencies. Market participants will closely watch the upcoming US CPI inflation data, which could determine the next move in the Dollar Index and global currencies. FII flows will remain another key factor, as recent improvement in foreign inflows has helped cushion the rupee’s downside,” said Jateen Trivedi, VP Research Analyst – Commodity and Currency, LKP Securities.

What lies ahead?There are some headwinds blowing again which might impact the Indian market in the near-term, said VK Vijayakumar, Chief Investment Strategist at Geojit Investments. He noted the escalation of tensions in the US-Iran conflict has pushed Brent crude to $84. If this spike continues it will again start impacting India’s macros, he added, saying the BoP vulnerability and the potential impact on the rupee can again become issues that may impact the market adversely.

“The spike in the U.S. 10-year yield to 4.61% is another concern which can impact FPI flows. India’s CPI inflation in June has increased to 4.38% and is likely to inch up higher.

Given these headwinds, investors have to exercise caution. In this fast changing geopolitical and economic environment, investment decision-making is becoming extremely challenging. Investors may watch this dynamic situation and wait for clarity to emerge, particularly on the crude price front,” according to Vijayakumar.

Technical view on NiftyTechnically, the near-term outlook remains cautiously neutral, said Rajesh Palviya, Head of Research at Axis Direct. He noted that Nifty needs to reclaim and sustain above 24,100 to improve sentiment, with 24,400 emerging as the next resistance zone.

On the downside, the analyst saw 24,000 to act as the immediate support zone, while a breach could trigger further weakness toward 23,900. A moderation in crude prices would be the key catalyst for a stronger market recovery, he said.(With inputs from agencies)(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)