Iran drones, missile strike Sensex, Nifty; 4 other reasons for today's market fall

Sensex, Nifty and key sectoral indices crashed as soon as the opening bell rang on Monday morning, as Iran's drones attack on Israel, along with the recent US inflation data, raised doubts over whether the market should factor in any Fed rate cut this year. Sticky inflation, higher oil amid geopolitical tensions and stronger dollar are near-term negative factors for stocks, said analysts. Concerns over changes to India-Mauritius tax treaty and forthcoming elections in India may only increase volatility, they said. 

Iran fired about 300 missiles and drones at the weekend in a retaliatory attack after its consulate was attacked in Syria by Israel. While Israel said it managed to strike down 99 per cent of the Irani drones and missiles and no casualty, PM Benjamin Netanyahu's war cabinet was reportedly in favour of 'hitting back’. Fears are if it does, oil that is already hovering around $90 a barrel mark should push inflation higher globally. US banks have already warned of costly deposits that may squeeze their interest income in 2024.

At 9.17 am, the BSE Sensex was trading at 73,675.85, 569.05 points or 0.77 per cent. Nifty was trading at 22,337.65, down 181.75 points or 0.81 per cent. Among Nifty stocks, Tata Motors fell 2.64 per cent to Rs 991.65. BPCL, Adani Enterpises, Tata Steel and Coal India fell over 2 per cent ach. Tata Consumer, Power Grid, NTPC, State Bank of India and Shriram Finance fell 1.7-2 per cent. Here are five reasons why the market fell today:

Oil prices
Iran would retaliate was certain and there were fears that oil prices may jump due to the evolving crisis. For now, however, Brent futures for June delivery were down 20 cents, or 0.2 per cent, to $90.25 a barrel while West Texas Intermediate (WTI) futures for May delivery were down 33 cents, or 0.4 per cent, at $85.33 a barrel. Still the market is afraid that a broader regional conflict may hit oil traffic through the Middle East. To investor's relief, the damage on the Israeli side due to missile attacks was minimal. 

"The US has refrained from direct involvement in the Israel-Iran conflict. Further escalation of tensions in the region could disrupt global supply conditions, leading to another surge in oil prices. Expectations point towards continued volatility in today's crude oil trading session. Support levels for crude oil are seen at $84.50–83.90, with resistance at $85.90-86.60," said Rahul Kalantri, VP Commodities, Mehta Equities.

US inflation, dollar appreciation
Nomura India said the specter of sticky US inflation -- that raises risk of a hawkish repricing, higher in rates/yields, higher oil prices (amid rising geopolitical uncertainty in the Middle East) and a stronger dollar create a potent mix where Asian stocks could struggle – at least in the near term.

"However, unless geopolitical tensions flare up significantly leading to sustained high oil prices, we do not think this is the start of a sustained downturn in stocks. There are three reasons for this. First, stocks in the past have tended to look through regional geopolitical tensions beyond initial knee-jerk moves lower," it said.

It noted that in the aftermath of the Russia-Ukraine conflict (Feb-2022), and Hamas’s attack on Israel (Oct-2023), oil peaked within two weeks of the events, before stabilising.

India-Mauritius tax treaty 
India amended the Double Taxation Avoidance Agreement (DTAA) with Mauritius to prevent misuse for tax evasion or avoidance. The amended pact has included --  the Principal Purpose Test (PPT), which essentially lays out the condition that the tax benefits under the treaty will not be applicable if it is established that obtaining that duty benefit was the principal purpose of any transaction or arrangement.

"There are many headwinds that will weigh on markets today: the renewed conflict in the Middle East, proposed changes in the India-Mauritius tax treaty and the hotter-than-expected US inflation are negatives, said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

Lok Sabha elections 2024

In the coming six-weeks starting from April-19 to June-1, India will go through the 18th General Elections. Lok Sabha elections will be held in over 7-phases for a period of over 44-days and the results will be announced by June 4. Back in 2019, the elections were held during April 2019 and May 2019 with the results being announced on May 23, 2019.

There are hopes that BJP will retain power for the third time. But volatility still persists ahead of the world's biggest elections.

"The BJP Manifesto General Elections 2024 has a strong positive read-through for Indian equities. The Party, expected to sweep the upcoming polls, emphasizes continuity in its reform agenda while preserving focus on financial macro stability. Capital Goods (railways/defense), Housing/Mortgages, Tourism, and Aviation are direct beneficiaries, while Textiles and Pharma API are probable winners. We maintain our medium-term positive outlook on the markets, with a preference for infrastructure and manufacturing sectors and a focus on SMIDs," Emkay Global said.