On hopes of US-Iran de-escalation, Sensex soars 634 points, oil cools off

Standard gold falls over 2.4% to Rs 39,772, biggest drop since Oct 2016

The benchmark indices rose to mirror the gains in global markets on hopes of a de-escalation in the US- Iran tensions.

While the rupee, too, appreciated by 48 paise to close at 71.21 against the dollar (during the day, it traded in the range of 71.52 and 71.17 to the US currency), crude oil and gold prices witnessed a sharp correction.

The benchmark indices -- Sensex and Nifty -- rose 1.5 per cent each, their biggest single-day stride since October 23, 2019. The Sensex rose 635 points, or 1.5 per cent, to end at 41,452, while the Nifty surged 191 points, or 1.6 per cent, to close at 12,216. A day earlier, both indices tanked as investors were worried about the possible fallout of the Iranian missile strike against the American forces in Iraq, days after top Iranian general Qasem Soleimani was killed in a US drone strike in Baghdad.

Global stocks stabilised after Iran's Foreign Minister Javed Zarif tweeted: “We do not seek an escalation or a war.” On Wednesday, US President Donald Trump said that Iran's attack did not result in any casualties and added that Tehran appears to be “standing down”.

 "The US- Iran crisis had destabilised the whole thinking that global growth will pick up because of the phase one trade deal between the US and China. The latest de-escalation has brought back that optimism,” said Andrew Holland CEO, Avendus Capital Public Markets Alternate Strategies.

Brent crude fell 4 per cent in the last two days and ended Thursday's session at $65.5 a barrel, after rising as high as $71 during the week. The rising crude oil price had stoked fears of inflation pressures in the economy. India is one of the biggest importers of oil and every  $10 rise in crude pushes the headline consumer price index inflation by 0.4 per cent.

 "The easing of the geopolitical concerns led to a risk-on rally across global markets. The latest geopolitical concerns had a bigger sensitivity to the global oil prices," said Rajat Rajgarhia, managing director, Institutional Equities, Motilal Oswal Securities. However, some analysts were sceptical. They said investors are naively hoping the current round of tensions as a show strength, and that there could be panic selling if there is a further escalation of tension between the two countries.

Market players, on the other hand, said the US-China tariff deal next week, the third-quarter results and the factory output data, set to be released soon, will give some direction to the market.  

"Ultimately, events come and go, but earnings essentially determine where the markets are headed. This quarter will be subdued; hence investors will be closely watching the management commentaries," said Rajgarhia.

Source: Bloomberg/IBJA; Compiled by BS Research Bureau

The market breadth was inclined strongly on the advancing side on Thursday with two stocks advancing for every declining stock on the BSE. All the sectoral indices on the BSE, barring one, ended with gains. The realty sector index gained the most and ended the session at 2,330, a gain of 2.8 per cent. Barring four, all stocks rose and the biggest gainers were ICICI Bank, State Bank of India, IndusInd Bank, and Mahindra & Mahindra.

With easing tensions, the rush to the safety of gold stemmed, too. The yellow metal fell from Wednesday’s intraday high of $1,611 per ounce to $1,545 per ounce now. In India, on the MCX futures, gold fell from its Wednesday’s high Rs 41,293 per 10 gm to Rs 39,770 per 10 gm at the close of Thursday’s session.

In Mumbai spot also, standard gold was down over 2.4 per cent to Rs 39, 772 per 10gram (without GST), while silver lost 3 per cent in a day to close at Rs 46,375 per kg. This fall in the gold price in the spot market was the sharpest after October 2016.

Analysts were unsure about the future price of gold. According to Nigam Arora, US-based market observer and author of Arora Report, “Technically, gold was much overbought and due for a correction.” He also said the only thing that was working for crude oil was the Iran situation, “otherwise, global supply has been more than the demand.”

On the other hand, Saurabh Gadgil, chairman and MD of PNG Jewellers, said: “The gold price, in general, is looking positive, and investors and consumers have realised this. As a result, even at this high price, we have seen the usual demand. However, I would say it is a time for investing in gold, but not speculating in gold.” He said consumers buy 22-carat gold for jewellery and Thursday’s wholesale price for that was Rs 36,561, plus 3 per cent GST.

In India, the recent volatility in crude oil and precious metal prices on the MCX futures have resulted in many traders facing huge margin calls. Brokers are reducing clients’ leverage levels.

However, high volatility has resulted in multi-year record high volumes on the MCX. The MCX daily futures segment turnover was at a 7-year-high on Wednesday (the data comes with a day’s lag), at Rs 62, 318 crore, while option volumes were Rs 5,135 crore.

In crude oil futures & options, the turnover was at an all-time record of Rs 31,183 crore. Gold option and futures volume was at Rs 18,128 crore, and silver was at Rs 9,503 crore. In derivatives, higher the volatility, higher will be volumes.