Missiles fly, markets rise: Why Sensex is climbing despite fresh US-Iran escalation

Fresh US strikes on Iran and Tehran's threat have reignited tensions around the Strait of Hormuz, after attacks on commercial shipping. Yet, on Dalal Street, investors are responding with surprising calm.

In Short

• US launches fresh strikes on Iran, Trump ends June 17 Iran deal
• Tehran threatens retaliation, Strait of Hormuz tensions high
• Markets focus on oil prices, not war, Brent crude below $80

The headlines from the Middle East could hardly be more alarming.

The United States has launched fresh strikes on Iran. President Donald Trump has declared the June 17 Iran understanding effectively "over". Tehran has threatened retaliation, and tensions around the Strait of Hormuz remain elevated after attacks on commercial shipping.

Yet, on Dalal Street, investors are responding with surprising calm.

The Sensex was up 531 points at 77,035.15, while the Nifty rose 171 points to 24,053.30 by 9:51 am on Thursday, marking a recovery after the previous session's crash.

The reason is simple: Dalal Street is not trading the war. It is trading oil.

WHY MARKETS FELL FIRST

Markets had reacted sharply on Wednesday after Trump declared the Iran deal "over" and signalled further military action. The uncertainty triggered a sell-off, with Senex losing 1,600 points and Nifty shedding 516 points and wiping out nearly half of its recent gains.

According to Dr V K Vijayakumar, Chief Investment Strategist at Geojit Investments, long unwinding and fresh short positions amplified the decline.

"President Trump's statement that the ceasefire with Iran is over triggered sharp selling in the market shaving off 516 points from the Nifty," Vijayakumar said.

The immediate concern was crude oil.

India imports the bulk of its crude oil requirements, making it highly vulnerable to any prolonged disruption in global energy supplies. A sharp rise in oil prices can push up inflation, widen the current account deficit and hurt corporate profitability.

WHY MARKETS ARE RISING NOW

Despite the military escalation, investors are not yet seeing signs of an energy crisis.

Brent crude briefly climbed towards the $80-a-barrel mark following the latest developments but remains far below levels that would trigger panic about India's macroeconomic stability.

"Brent at $80 is not a problem. It won't create a balance-of-payments crisis," Vijayakumar said.

The bigger concern is the Strait of Hormuz, the narrow waterway through which roughly a fifth of the world's oil trade passes.

Markets are effectively betting that while the US and Iran may continue exchanging strikes, neither side wants a prolonged disruption to global oil supplies.

"The crisis will re-emerge only if the tensions lead to the closure of the Strait of Hormuz and consequently crude spikes above $100," Vijayakumar said.

For now, there is little evidence that traders expect such a scenario.

In fact, oil futures suggest the opposite. September crude contracts are trading below current spot prices, indicating that markets expect the present spike to ease rather than intensify.

"September crude is trading at $76, which means the market doesn't believe that the situation will aggravate," Vijayakumar noted.

FIIs ARE PROVIDING SUPPORT

Another factor helping the market absorb geopolitical shocks is the return of foreign investors.

Foreign institutional investors (FIIs), who had remained cautious for much of the year, have turned net buyers in recent sessions.

According to Vijayakumar, FIIs have bought equities worth Rs 3,954 crore in the cash market over the last four trading days.

As long as crude prices remain stable and the conflict does not disrupt energy flows, foreign investors are expected to continue supporting Indian equities.

Large-cap stocks, particularly in financials and automobiles, are likely to remain relatively resilient under such conditions, he said.

THE REAL RISK FOR DALAL STREET

The market's resilience should not be mistaken for complacency.

Investors are closely watching every development in the Gulf. However, they are distinguishing between military escalation and economic disruption.

Fresh US strikes, Iranian threats and fiery rhetoric can create volatility. But what truly matters for India is whether the conflict spills over into global energy markets.

As long as oil remains below crisis levels and shipping through the Strait of Hormuz continues largely uninterrupted, investors appear willing to look through the geopolitical noise.

The calculation, however, could change very quickly.

A sustained disruption in Hormuz or a crude oil spike above $100 a barrel would immediately revive concerns over inflation, growth and India's external balances.

For now, though, the market's message is clear: missiles matter, but oil matters more.

(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)

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