Nifty 50, Sensex drop nearly 1% amid escalating tensions in Middle East; Nifty IT index fell 1.74%

However, Iran has rejected reports of a missile attack. Israel hasn’t yet confirmed that it has launched airstrikes on Iran. Explosions were heard near an airport in Isfahan, not Tehran but there is no confirmation that it was a retaliation.

The escalating conflict in the Middle East contributed to a downturn in stocks, while safe-haven assets like Treasury bonds and the dollar experienced gains. Tensions between Israel and Iran have heightened in recent weeks, particularly after Iran’s alleged launch of drones and missiles on April 13 in response to an attack it attributed to Israel. This geopolitical uncertainty has kept global markets on edge.

Also Read: Iran says ‘drones shot down’ after Israeli retaliation, Tel Aviv yet to confirm

Following the reports of explosions, Asian markets saw significant losses at the opening of Friday’s trading session, with Japan’s Nikkei 225 declining by 3.3% and the broader Topix index falling by 2.78%. 

South Korea’s Kospi index dropped by 2.83%, while the Kosdaq index plummeted by 3.25%. Hong Kong’s Hang Seng index decreased by 1.49%, and mainland China’s CSI 300 index slipped by 0.68%.

Reflecting the downturn in Asian markets, India’s Nifty 50 opened the session with a gap down of 134 points at 21,861 points and hit an intraday low of 21,777.65 points, down 0.99%, while the Sensex also plummeted by 0.92% to hit an intraday low of 71,816 points.

Among sectoral indices, the Nifty IT index slumped 1.74% on weak earnings posted by Infosys. 

Further, the markets were also impacted by the likelihood that a near-term rate cut by the U.S. Fed is diminishing, as indicated by New York Fed President John Williams. Speaking at a Semafor conference in Washington, D.C., Williams expressed that he does not perceive any “urgency” to reduce interest rates. 

Also Read: Will Indian stock market see further sell-off amid delay in US Fed rate cuts? Here’s what experts say

While acknowledging the potential need for rate adjustments in the future, Williams emphasised that such decisions would be contingent upon economic conditions. He highlighted the current positioning of interest rates as gradually aligning with the Fed’s objectives.

On Tuesday, US Fed chair Jerome Powell also stated that there has been “a lack of further progress so far this year on returning to our inflation goal.” He indicated that a tight policy is likely to persist until inflation trends constantly move closer to 2%.

His remarks followed the release of the consumer price index for March, which surpassed earlier projections earlier this month. Subsequently, the anticipated timing for the first-rate cut has shifted from the previously anticipated June date.

Also Read: Will rising US bond yields cause more FPI outflows from emerging mkts? here’s what experts say

In March, the US retail inflation figure surged to 3.5% annually, exceeding the projected 3.4%.

Oil prices zoomed

Meanwhile, escalating tensions in the Middle East have propelled oil prices higher. Brent crude futures are currently trading up by 2.77% at $89.33 per barrel, while WTI futures are also experiencing gains, up by 2.23% at $84.87 per barrel.

Analysts have previously warned that if tensions continue to escalate, crude oil prices could quickly surge to $100 per barrel. 

Bond yields strengthened further

The U.S. 2-year Treasury yield rose close to 5% on Thursday following data indicating strength in the manufacturing sector, while the yield on the 10-year Treasury rose by nearly 5 basis points to 4.633%.

The rally in bond yields came after the Philadelphia Federal Reserve’s manufacturing survey was much higher than economists had forecast. It jumped to 15.5 for April, well above the consensus estimate of 2.5 from economists polled by Dow Jones.

Another fresh low 

In today’s trading session, the Indian rupee plummeted to a new low of 83.83 against the US dollar. This decline was driven by the strengthening of the US dollar index, which surged following an uptick in US Treasury yields. 

Also Read: How the rupee’s fall can impact the economy and what RBI can do about it

The Federal Reserve’s indication of a potential delay in its first rate cut since 2020 until later this year added further pressure on emerging market currencies. 

Continued rally

In the face of escalating geopolitical tensions, investors are seeking refuge in the safe haven asset, gold, which rallied 0.9% on Thursday. Despite robust economic data from the U.S., which diminishes the likelihood of immediate interest rate cuts, gold prices are holding strong. 

Also Read: Gold prices jump after escalation in Iran-Israel war. Should you buy in this rally?

The combination of strong economic indicators and hawkish comments from the Federal Reserve has led investors to reconsider the probability of rate cuts in the near future.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 19 Apr 2024, 10:12 AM IST