Indian Markets Rally Despite Geopolitical Pressures
Over the previous week we had mentioned that the global equity markets in general and Indian equities in particular are seen scrambling to find a temporary base for themselves. In the week before this one, Indian equities were stable and relatively outperformed the global equity markets. Over the past five days, the Indian equities continued to perform much better than their peers and stayed in positive returns territory while the global counterparts shed some more weight. Moreover, apart from just staying stable over the past five days, some return of risk-on approach was also seen.
This was evident from the fact that while safe haven assets like gold came off from their highs, riskier assets like crypto currencies bounced off from their lows. Meanwhile, the Russia- Ukraine conflict is almost two weeks old and has refused to show any respite. Despite talks of ceasefire, Russian troops continued attacking civilians, hospitals and other civic infrastructure. The beginning of this week saw another gap down but since the equity markets had piled up massive shorts it led to a huge short covering-led technical pullback.
From the low of 15,671, Nifty has bounced off close to 1,000-odd points in just three sessions. Despite such great pullbacks, Nifty 50 and the broader Nifty 500 indices returned negative returns of -0.93 and -1.11 per cent, respectively. They still managed to relatively outperform the S & P 500, Dow Jones Index and the Nasdaq as they returned negative returns of -1.96 per cent, -1.50 per cent and -2.09 per cent, respectively, over the last week. The debt markets were not kind either. The bonds lost some ground and this saw the US 10-year yield surging by 11.49 per cent to 1.94 by the middle of the week.
Another notable event that led to calming the equities was crude oil coming off from its peak. After testing a high of USD 139 per barrel, crude prices retraced swiftly to USD 106 on Wednesday night only to inch a bit higher after that. If we sum up, with no evident additional negatives apart from what are seen on the geopolitical front, massive shorts in the equity markets and cooling off of crude from its peak by almost USD 23 gave a sentimental boost which ultimately led to a massive, short covering-fuelled relief rally. On expected lines, this also resulted in sectors like oil and gas, metals and commodities seeing some profit-taking at higher levels.
Meanwhile, the beaten-down pockets took some respite and bottom-fishing from the lower levels. The reasons enumerated above are technical ones that led the equities to rally. Apart from this, the domestic factor that contributed to sentimentally aiding the markets included the assembly elections results. On anticipated lines, BJP is set to return to power in Uttar Pradesh and Uttarakhand and is seen predominantly leading in Goa. Aam Aadmi Party (AAP), on the other hand, swept clean the state of Punjab. There is not much change seen on the global sector allocation as seen on the relative rotation graph (RRG).
When benchmarked against the Vanguard Balanced Index Fund (VBINX), equity as an asset class as represented by S & P 500 continues to stay in the weakening quadrant while the other asset classes like debt and commodities continue to relatively outperform. Coming back to the Indian markets, two things can be said from a technical perspective. First, the most immediate low point of 15,671 is all set to act as a potential base for the markets in the immediate near term and second, Nifty is set to find a strong resistance in the zone of 16,900-17,000. The reason for this is that the strikes of 17,000 hold the highest ‘call’ OI accumulation and the all-important 200 DMA which Nifty violated stands at 16,952.
Since this support was violated, it may act as a potential resistance for the markets. Over the coming days, expect the equity markets to stay in a defined range with the level of 17,000 acting as potential resistance. Apart from this, the much stronger-than-expected economic sanctions are hitting the Russian economy hard. The largest nuclear plant in Europe is under siege from Russia and in the manner in which civilians and the civic infrastructure is being attacked, this geopolitical conflict stays far from over. This will continue to affect the global financial markets landscape over the coming days.
