Middle East turmoil drags market lower; Sensex, Nifty drop over 0.7%

Indian stock indexes fell on Monday as conflict in the Middle East threatened to roil oil markets, adding another layer of uncertainty for risk assets. These assets are already under pressure due to higher US bond yields and a stronger dollar.

The Sensex ended the session at 65,512, down 483 points or 0.7 percent. The Nifty closed the session at 19,512, down 141 points or 0.7 percent.

An unprecedented attack on Israel by Hamas, the Palestinian militant group that rules the Gaza Strip, on Saturday destabilized the region and sent markets into turmoil. The death toll from the attacks has exceeded 1,100 according to news reports, including 700 Israelis. In response, Israel declared war, saying it would not stop until Hamas’ military infrastructure was dismantled. Investors fear the conflict between Hamas and Israel could escalate into a wider battle involving Iran. A report by the Wall Street Journal indicates that Iranian security officials helped Hamas plan the attack. Analysts have mentioned that if Iran intervenes in the conflict, it could lead to a rise in already high oil prices.

Oil prices jumped more than 3 percent on Monday, with Brent crude hovering around $88 a barrel. The price of oil soared to $97 a barrel late last month, but showed signs of cooling last week.

Rising crude oil prices pose a significant challenge for India, as more than three-quarters of its crude oil needs are met by imports.

“In the Asian equity market, if oil prices rise in the coming days, major Asian net oil importers such as India and the Philippines may underperform,” Nomura strategists including Chetan Seth noted.

Equity markets have faced turbulence recently due to macroeconomic uncertainty in Europe and China, hawkish central banks and selling by emerging market foreign portfolio investors (FPIs). The 10-year U.S. Treasury yield was trading at 4.8% on Monday.

“The Indian market is sensitive to rising oil prices. The ongoing conflict has the potential to push oil prices higher over time. The Strait of Hormuz is a crucial point for oil trade. If Iran intervenes, it could obstruct the Strait of Hormuz. Furthermore, we currently have two geopolitical hotspots where the same set of global forces are at odds. The only positive aspect of all this conflict is the potential for lower yields as investors may turn to US Treasuries. This could ease some of the pressure on the Fed to hike rates,” commented UR Bhat, co-founder of Alphaniti Fintech.

Going forward, apart from corporate results, the minutes of monetary policy meetings of major central banks and statements by monetary policy officials will determine the market’s trajectory, market players said. Barring three, all Sensex stocks declined. HDFC Bank, which fell 1.2%, contributed 119 points to the Sensex decline, while Reliance, which fell 0.8%, dragged the index down 61 points. HCL Tech and TCS rose 1% and 0.5% respectively on optimism over the latter’s buyback proposal.