The Iranian air attacks on Israel threaten to derail the momentum in the stock markets where the bellwether Sensex roared past the 75000-mark last week.
Benchmark indices which are hovering around record highs could come under pressure when trading resumes Monday with the retaliatory action by Iran a fresh headwind after the higher-than-expected US inflation data for March.
While a weak opening is expected, Israel’s reaction to Tehran’s drone and missile attack is being closely watched. Market circles fear if Tel Aviv does not show any restraint and the hostilities intensify, stocks could be staring at a correction and investors would then seek safe haven assets such as gold, the US dollar and treasuries.
"On the Iran-Israel conflict, a lot of the market impact will depend on further escalation. Iran has said they have closure with this. If Israel further escalates or Iran does another round of attacks, the markets will be in risk-off mode’’, market veteran Ajay Bagga said on X.
"Precious metals and haven currencies as well as crude oil will go up while risk assets will see a sell-off. The fragile world economy can do without further challenges like these. Markets at elevated valuations and near all-time highs will watch the next 24 hours closely, hoping that this matter ends for now without further escalation’’, he added.
Last Friday, the Sensex closed the week at 74244.90 with a small drop of 3.32 points after hitting an all-time closing high of 75038.15 last Wednesday and a record intra-day peak of 75124.28, the day before.
The sentiment was affected by the higher-than-expected US inflation data for March which at 3.5 per cent pushed back expectations of an interest rate cut from the US Federal Reserve to beyond July.
For the domestic investors, the escalation in Iran-Israel conflict comes just as the fourth quarter earnings season has kicked off, with Tata Consultancy Services (TCS) coming out with decent numbers.
While it will be a holiday shortened week since the markets will be closed on Wednesday because of Ram Navami, Infosys will announce its results on Thursday and Wipro on Friday.
Santosh Meena, head of research, Swastika Investmart, said the week will be crucial for the market as fresh worries about a potential conflict between Iran and Israel emerge.
"Any significant escalation in tensions could trigger panic selling and volatility in global equity markets. The market will also be closely monitoring the movement of crude oil prices, which are often impacted by geopolitical events,” he added.
On Friday, Brent crude settled at $90.45 per barrel. Observers fear if there is an escalation in the Iran-Israel conflict, crude oil prices could touch the $100-per-barrel mark.
It comes at a time Opec extended voluntary cuts of 2.2 million barrels per day to "maintain the stability and balance of oil markets’’.
For India, rising crude oil prices will be bad news since retail inflation is yet to settle around the mandated 4 per cent target of the Reserve Bank of India (RBI). It could lead to interest rates staying at elevated levels for a longer period.