Markets poised for a near-term dip, crude can worsen the sentiment

Mint

5 hours ago

US President Donald Trump announced that Washington has carried out strikes on three nuclear facilities in Iran, marking a direct involvement in the campaign initiated by Israel last week to dismantle Iran's nuclear infrastructure.
Since the war started two weeks ago, the Nifty 50 and the Sensex 30 index have gained 1.59%. At the same time, crude oil prices have gained 2.19% to $76.57 per barrel.
The US has long been watchful about Iran's expanding nuclear programme, with tensions rising especially a couple of years ago when Iran's uranium enrichment neared 83.7% (very close to weapons-grade, 90% enrichment), said Alok Agarwal, head-Quant and Fund Manager at Alchemy Capital Management. 'This concern has now escalated to the point of direct US military action, making the situation more volatile, in our view," he added.
Read more: US strike on Iran raises oil shock, capital flow risks for India's economy
From an Indian investment perspective, the primary concern isn't just the geopolitical tension itself—which mostly affects market sentiment—but the potential surge in crude oil prices, which would have a direct economic impact, Agarwal added. Moreover, a sharp spike—especially beyond the $100/barrel mark—would be a major concern for Indian markets, as India imports over 80% of its crude requirements.
Crude price impact
Aniruddha Sarkar, CIO at Quest Investment Advisors, said that the key concern for the market is the impact of rising crude prices, which could widen the current account deficit, fuel inflation, and weaken the rupee due to higher forex outflows owing to a higher fuel bill and foreign institutional investors (FII) selling in risk-off mode from emerging markets.
The second stage impact, which could happen if the war persists for long, would be on sectors like oil marketing companies (OMCs), paints, and aviation, which could face cost pressures and perform negatively as crude prices climb, Sarkar added. However, he said that these impacts could remain short-lived as the war may not continue for a long time.
While other experts believe that no further retaliation by Iran might actually lead to an upside in the Indian markets.
"If Iran doesn't retaliate in a way that is surprising or nasty, markets could actually rally as investors reckon the tensions would abate, but if there are attacks on the Strait of Hormuz or on US bases, tensions could actually escalate and all bets would be off the table," said Nirmal Bhanwarlal Jain, founder of IIFL Group and managing director at IIFL Finance.
Anthony Heredia, MD & CEO, Mahindra Manulife Investment Managers, said, 'If there is no escalatory move from Iran now or over the next few days, you may actually see positivity extending as in a risk-on market environment, people anecdotally find reasons to be optimistic rather than the other way around."
Taking advantage
Markets have shown remarkable resilience so far in the face of international skirmishes and tariff threats, and if there could be further escalation of tensions in the coming weeks if Iran were to retaliate, investors would do well to keep the powder dry to take advantage of any market correction, said Sandeep Bagla, CEO, TRUST Mutual Fund.
Read more: Mint Explainer | Strait of Hormuz: Will Iran shut the vital oil artery of the world?
George Thomas, fund manager at Quantum Mutual Fund, said that in the coming few days, markets are expected to be very volatile. Hence, investors should invest in a staggered manner, as it helps average out the cost and reduces risk.
The India VIX index has fallen 9.13% since 13 June, when the war started.
From a technical standpoint, the prolonged phase of consolidation has notably impacted key indicators, said Sudeep Shah, deputy vice president, head - Technical & Derivatives Research at SBI Securities.
'The upward slope of the short and medium-term moving averages has slowed down, reflecting a loss of momentum. Simultaneously, the daily RSI (Relative Strength Index) continues to move sideways, in line with the RSI range shift concept that suggests a lack of directional bias. Further, the trend strength indicator – ADX (Average Directional Index), is currently quoting near the 13 level, which was the lowest level since July 2024, which shows a lack of strength in either direction," Shah added.
Shah added that the zone of 24,880-24,850 will act as immediate support for the Nifty 50 index. While on the upside, the zone of 25,200-25,250 will act as a crucial hurdle for the index, he said.
However, India is in a better place than other times when there has been tension, experts say.
'While we find ourselves in a more inflationary than disinflationary environment, India has never been in a better place than it is now to handle the repercussions of the latest round of tensions," said Kenneth Andrade, founder and CIO of Old Bridge Capital Management.
Even the Asian indices closed higher on Friday. The Hang Seng index closed 1.29% higher, the Kospi index closed 1.48% higher, and the CSI 300 index ended 0.09% higher.
Where's oil headed?
Under the severe outcome, oil prices could surge to $120-130 per barrel if the Strait of Hormuz is closed or there is a general Middle East conflagration, which could ignite retaliatory responses from major oil-producing countries, said JP Morgan in a report on 12 June.
Concerns are that if Iran closes the Strait of Hormuz, the global oil supply will be disrupted, which in turn will cause a rally in oil prices.
Read more: Donald Trump's war dilemma: Should America put boots on the ground in Iran or not?
However, historically, Iran has never fully closed the Strait of Hormuz, even during major conflicts like the Iran-Iraq War (1980-1988), the rise in US-Iran tensions after 2011, or the fallout from the Iran nuclear deal (2018-2020).
Experts say that this is because doing so would hurt Iran more than help it.
About 20% of the world's oil passes through the Strait of Hormuz, which is also a key path for liquefied natural gas exports, especially from Qatar, one of the biggest suppliers.
'US naval forces in the Persian Gulf act as a strong military deterrent, and any closure attempt by Iran would risk severe retaliation," said Yes Institutional Equities in a report dated 18 June. It further added that Iran depends heavily on the Strait for its own oil exports and critical imports, making a blockade counterproductive.
'Moreover, shutting the Strait would harm regional allies like Qatar and Iraq, who also rely on the waterway, potentially straining Iran's strategic relationships. It would also violate international maritime law, further isolating Iran diplomatically," Yes Institutional Equities said.
Hence, experts say that Iran has often used the threat of closing the Strait as a political tool to gain leverage in talks—without actually going through with it.