Markets Eye West Asia Tensions After US Strike on Iran: 3 Cues to Watch on D-Street on Monday

Just when analysts were hoping for a renewed bullish sentiment to take hold on D-Street after the BSE Sensex's 1,000-points rally on Friday, escalating tensions in West Asia dashed all those hopes. The US launched a targeted attack on 3 Iranian nuclear sites, namely, Fordow, Natanz and Isfahan with Trump calling the strikes "a spectacular military success."

The direct exchange of missiles between Israel and Iran had already triggered a major risk-off sentiment among global investors. While some D-Street analysts expected tensions to take a breather and have only a limited impact on the Indian stock market, that outlook now faces renewed pressure as the US steps directly into the conflict.

"Geopolitical uncertainty continues to loom, as statements from world leaders regarding possible military involvement in the Middle East keep markets on edge," said Vinod Nair, head of research, Geojit Investments. Just a few days back, Russia had warned the US against any kind of "military intervention in the situation" adding that there would be "unpredictable negative consequences."

With the geopolitical situation, quite evidently, signalling signs of escalation, here are 3 key triggers investors should watch out for next week-

1. Oil Prices

Foreign commodity markets are already estimating a hard impact on oil prices as the US involvement has intensified the Iran-Israel conflict. Earlier this month, JP Morgon said in a market note that oil prices could reach $120-$130 per barrel in the worst-case scenario, which includes the closure of the Strait of Hormuz.

While the investment bank maintained a moderate stance on Brent crude prices, with a base case forecast in the low-to-mid $60s for the year, JPMorgan warned that an attack on Iran could spike oil prices to $120, potentially driving US CPI to 5%.

For downstream oil companies like BPCL and HPCL, investor sentiment might weaken further. Shares of oil-sensitive sectors, including aviation, paints, adhesives, and tyres, are likely to follow a similar trajectory.

2. FII Activity

After a consecutive buying spree in April and May, the confidence of foreign institutional investors (FIIs) is once again dwindling as risk-off sentiment rises. "After a big buy figure of ₹19,860 crores in May FIIs turned less confident in June with bouts of selling and buying. The net FII activity in June till 20th is a sell figure of ₹4,192 crore (NSDL)," said VK Vijayakumar, chief investment strategist, Geojit Investments.

Even in the debt markets, foreign investors are turning net sellers, driven primarily by the historically low yield differential (now around 2%) between the US and Indian sovereign bonds.

It doesn’t make sense to invest in bonds and, therefore, this trend of FPI selling in bonds is likely to continue, considering the currency risk, as per analysts. "Given the global uncertainty dominated by geopolitics, particularly the war in West Asia, FPI activity will be in response to the geopolitical developments," said Vijayakumar.

3. Technical Outlook

Over the past month, markets have remained largely range-bound as escalating tensions in West Asia kept investor sentiment in check. However, with the direct involvement of the US, the risk-off sentiment is likely to rise.

"With the Nifty approaching the upper boundary of its consolidation range, the focus should remain on sector-specific leadership and identifying stocks that are showing relative strength within those sectors. A breakout above 25,200 may trigger fresh buying; however, traders should be cautious of false breakouts, especially amid heightened volatility due to the monthly expiry," Ajit Mishra – SVP, research, Religare Broking Ltd.

"On the downside, 24,700 and 24,400 will serve as immediate and crucial support levels," said Mishra.