Sensex Sheds 555 Points on Oil Supply Fears

Synopsis

Indian equity indexes on September 8 moved deeper into red for a second consecutive day, with the Sensex dropping by 555.23 points and the Nifty50 by 144.05 points as oil prices for Brent to reach $100 a barrel and Saudi energy facilities attacked in an escalating U.S.-Iran conflict continued to weigh on markets.

Markets pull back to 3-month lows

The sanguine mood on Dalal Street on Tuesday was further soured by global volatility in energy prices, which has overshadowed domestic earnings optimism. Oil prices rose on geopolitical uncertainty as investors grew more pessimistic in every equity index, extending the losses for the second session in a row to their lowest point since mid-June.

The Numbers

The Sensex fell 555.23 points, or 0.73 per cent, to close at 75,577.58, while the Nifty50 dropped 144.05 points, or 0.61 per cent, to settle at 23,635.10.

There was no uniformity in the performances of the sectors either, as SBI Life Insurance, ICICI Bank and Axis Bank were among the worst performers on the Nifty50, with the Nifty MidCap and Nifty SmallCap indices gaining 0.21 per cent and 0.17 per cent, respectively, even as Private Bank and Financial Services stocks eroded the maximum losses. Nifty Pharma and Healthcare performed well despite the overall slump.

The session was off to a slow start. The BSE Sensex and the NSE Nifty50 were also extending losses on Monday, as their trade figures were released early and the Sensex opened 269.81 points down at 75,863, while the Nifty50 was down 88.25 points to 23,690.90, extending a trend of losses seen on the day in the Sensex, which had dropped 382.62 points or 0.50 per cent to close at 76,132.81.

The Crude Oil Trigger

The immediate trigger was a renewed surge in Brent crude as the result of reports of attacks on Saudi Arabian energy infrastructure. Saudi Arabia's Energy Ministry said multiple energy facilities were attacked in the kingdom's southern province Tuesday morning, and Brent crude prices climbed over 2 per cent to trade at just under $90 a barrel.

Market strategists made no bones about their view that the relocation was directly tied to equity weakness, pointing out that a price above the psychologically significant $100 would make the path of earnings that had been outlined over the June quarter more challenging.

Analyst Caution

Market comments via wire agencies were downbeat. The sharp rally in mid- and small-cap stocks compared with large caps over the last five- to six-months could be challenging to maintain, and with crude oil prices also crossing $100 per barrel, it was prudent for short-term investors to start realizing some profits, one market expert quoted.

The study also suggested that investors should switch from equities to non-equity exchange-traded funds (ETFs) and non-defensive areas like Healthcare, Telecom, FMCG, Diversified businesses and IT, as well as shifting their focus to large-cap stocks, for a safer posture.

Why It does Matters

A prolonged oil price rally acts as an external tax on growth for the overwhelmingly oil importing economy, expanding the trade gap, forcing the rupee and making the task of the Reserve Bank of India that much trickier to control inflation in the festive season.

Broader Context

The government has also allowed military equipment procurement projects valued at ₹1.10 lakh crore, though fresh Middle East tensions were blamed for part of the pressure as reports indicated that defence stocks were being bought selectively against the same geopolitical backdrop.

Outlook

As the Strait of Hormuz conflict continues to look like it will be a prolonged one, traders are anticipating volatility on Dalal Street this week, preferring large caps and defensive stocks to the more volatile mid and small caps.