Brace for more volatility as West Asia tensions escalate

Market outlook Dear Reader, Indian equities posted fourth straight weekly losses, hit by renewed anxiety over tensions in West Asia, climbing crude oil prices and elevated global bond yields. This week promises to be no different. The Nifty lost 277.95 points, or 1.14 percent, to end at 23,897.70 on Friday. FIIs extended their selling for a third consecutive week, offloading equities worth Rs 5,611.94 crore. The broader market showed a mixed picture with the midcaps tracking the benchmark and dropping 1.5 percent, however smallcaps touched a fresh high of 20,187.80 during the week. Among sectors, autos took the hardest hit, sliding 4 percent, followed by consumer durables, media, healthcare and FMCG, all down between 2 and 2.6 percent. Oil and gas gained as oil prices firmed amid the geopolitical standoff. Total market capitalisation on the BSE shrank by roughly Rs 4.5 lakh crore over the week. The rupee rose to a two-month high and extended its gaining streak for a second straight week. India's volatility gauge, the Nifty VIX, ended largely flat after a choppy week, swinging between 12.12 and 9.25. Much of that volatility traced back to global crude prices, which surged nearly 9 percent over five sessions to touch $97.62 a barrel as the United States and Iran resumed hostilities after a month-long pause, trading missile and drone strikes on strategic targets with no sign of a truce in sight. Brent crude has climbed more than 20 percent over the past month. Adding to the unease, US Treasury yields rallied to a three-year high of 4.818 percent before easing after Federal Reserve Governor Christopher Waller signalled that he was inclined to support holding rates steady, which took some of the edge off rate-hike fears. Wall Street ended the week on a mixed note as investors weighed the same Iran tensions alongside a better-than-expected jobs report and shifting Fed policy expectations. Heading into next week, the West Asia conflict looks set to remain the dominant swing factor for global markets. Late in the week, the US military said it had struck three Iranian oil tankers after two Navy warships came under missile attack and warned it could target more of Iran's oil fleet if the provocations continued. Any further escalation, particularly after the reported strikes on Iranian tankers, could push crude prices even higher and stoke fresh bouts of volatility. Investors will also track US Treasury yields and any fresh signals from the Fed ahead of its September meeting. On the domestic front, attention will turn to the Reserve Bank of India's special USD-INR forex swap facility as its deadline nears, as well as foreign portfolio flows. Continued bearishness likely On the weekly timeframe, the Nifty closed at 23,897.70, down 1.15 percent for the week. The index continues to trade above the key yellow trendline, which has consistently acted as strong support, though prices are trading below the 40-week EMA, suggesting bearishness in the overall trend. The index also witnessed a breakdown from the rising wedge pattern this week, and a follow-up bearish move in the coming week would provide further confirmation of the breakdown. Additionally, the RMI indicator has given a bearish crossover, further supported the bearish bias and indicated the possibility of continued weakness in the near term. The FII Net Index Futures Position indicator shows that FIIs have remained net sellers this week, with the indicator trending lower and showing continued selling in index futures. The indicator currently stands at -2,35,838. It is also facing resistance at the marked white trendline, where, historically, such resistance has led to a price decline, a pattern that played out in early August, when a similar rejection was followed by a downward move. The indicator is also moving within a declining channel, suggesting that FII positioning remains bearish. The 20-day Advance-Decline Ratio is currently in the oversold zone, indicating extreme weakness in market breadth, and historically such readings have often been followed by a short-term bounce in the market. A similar setup can currently be observed. If the indicator shows a positive uptick and forms a higher-high and higher-low structure, it could signal an improvement in market breadth and increase the possibility of a short-term recovery in the broader market. The percentage of Nifty 50 Stocks with the RMI Buy (Daily) indicator shows positive divergence, with the indicator forming higher highs while the Nifty index forms lower highs. This positive divergence indicates improving market breadth and suggests a potential bullish shift in underlying market momentum. If it sustains and the indicator continues to strengthen, it could support a recovery in the broader market. Sector Rotation Nifty 50 – The Benchmark Index ended lower by -1.15 percent this week, closing at 23,897.70. Weekly RRG: Leading Quadrant: Nifty IT entered the quadrant this week, indicating an improvement in relative strength, with momentum also continuing to strengthen. Nifty Realty remains in the leading quadrant; however, its momentum has been declining over the past few weeks, suggesting a slowdown in relative outperformance. Meanwhile, Nifty Consumer Durables and Nifty Auto remain in the leading quadrant, but a slowdown in momentum is evident, suggesting a moderation in their relative strength. Weakening Quadrant: Nifty Bank has recently entered the quadrant, with a decline in momentum indicating a slowdown in relative strength. Nifty Infrastructure continues to remain in the weakening quadrant, with relative strength deteriorating and indicating potential further underperformance. Nifty Metals also remains in the weakening quadrant; however, momentum has improved over the last two weeks, indicating some bounce in relative performance. Meanwhile, Nifty Pharma, Nifty Media, Nifty MNC, Nifty Private Bank, and Nifty Financial Services remain in the weakening quadrant, with momentum continuing to decline, suggesting a slowdown in relative performance. Lagging Quadrant: Nifty Energy has recently entered the quadrant, with some improvement in momentum; however, the sector remains relatively weak, indicating sustained underperformance. Nifty PSE and Nifty Oil & Gas remain in the lagging quadrant, but improving momentum could indicate a short-term bounce in relative strength. Meanwhile, Nifty PSU Bank and Nifty FMCG continue to witness declining momentum, suggesting further weakness in their relative strength and continued underperformance. Stocks to watch Among the stocks expected to perform better during the week are RBL Bank, Solar Industries, JSW Steel, APL Apollo, Idea, IDFC First, Coforge, Grasim, Titan, BHEL, Aurobindo Pharma and PNB Housing. Cheers, Shishir Asthana