Markets Bear the Brunt of Geopolitical Conflict
The geopolitical tension created out of the Russia- Ukraine conflict has been escalating and is the only external factor that has continued to hold global equity market sentiment at ransom. The past five days were not as bearish as they were in the previous week but the global equity markets certainly lacked the conviction of finding a base for themselves and trying a technical pullback. The uncertainty was so much that neither risky assets like equities and others gained much nor was defensive buying seen in gold as it retraced from its recent highs. The markets just spent the week not certain which directional bias to adopt. The global tensions as well showed no signs of tapering down.
The Indian retail investor continued to suffer the brunt of a gap-down opening and although these losses were recovered in the following sessions, the lack of synchronization and alignment in the trading hours between the global futures market and that of India kept hurting the retail segment. Thankfully, the only thing that declined over the past five sessions was volatility. India VIX declined 8.60 per cent. During the same time, most of the global markets remained in the green and in line with their peers. While Nifty and the broader Nifty 500 indices gained 2.20 per cent and 3.08 per cent, respectively, the S & P 500 index gained 2.28 per cent.
The technology-heavy Nasdaq and the Dow Jones Industrial Average gained 2.07 per cent and 2.01 per cent, respectively. With the global equities largely remaining stable, the bond space has cooled off as well. The US ten-year bond yield stayed quiet at 1.86 and stayed comfortably below the 2-2.05 range. Despite the apparent calm in global equities, the current geopolitical tension has started to inflict collateral economic harm which will result in inflationary pressures across the globe. Not to mention the most obvious one – crude oil.
Crude tested its eight-year high at 116, resulting in a gain of 14.36 per cent. While this remained a pretty obvious aftermath, there are collateral and additional inflationary pressures that will be felt across the globe as well. Russia, apart from being a major source of oil, is also one of the major sources of industrial metals and grains. Over the past five days, wheat futures gained 14.36 per cent and the Dow Jones indices US Aluminium Index (DJUSAL) spiked 12.64 per cent. Over the coming days, inflationary pressures will be felt because of these spikes in the prices. The effect of this was seen in the domestic metal space as well.
Stocks such as those of Hindalco, Tata Steel, VEDL, JSW Steel and Hindustan Zinc gained between 13.22 per cent and 20.05 per cent over the past five days. While using the Vanguard Balanced Index Fund (VBINX) as a benchmark, if we examine equities along with other asset classes on the relative rotation graph (RRG), the equities represented by SPDR S&P 500 ETF are seen grossly underperforming the other asset classes in relative terms. On the other hand, commodities, represented by iShares S & P GSCI Commodity-Indexed Trust (GSG) and iPath Bloomberg Commodity Index Total Return ETN (DJP) are in the leading quadrant with strong relative momentum in place.
Returning to the Indian markets, Nifty is seen scrambling to find its immediate base and bottom in place. The index is now below all the three key moving averages. After breaking down from a bearish descending triangle, the index slipped below the 200 DMA which presently stands at 16,923. In the event of any technical pullback, the upsides are likely to stay limited and will find stiff resistance between the 16,900-17,000 levels. Overall, the markets are presently in a range and a stage where excessive leverage must be avoided.
From a technical standpoint, the Nifty is showing minor signs of finding a short-term base for itself. However, it will stay impacted by the fluid situation on the geopolitical front. Even if a technical pullback occurs, the zone of 16,900-17,000 will pose stiff resistance. The best way to navigate these troubled times is to keep overall exposures under control. While avoiding shorts, investors can choose to pick up select good quality stocks from a medium-term perspective while avoiding highly leveraged trades in the current market situation.
