Explained: Why is stock market rising today even as Iran-US war escalates, oil prices cross $85

The Indian stock market bucked investor concerns around fresh escalations in the Iran-US war and rising oil prices to trade in green, with Sensex and Nifty nearly wiping off all losses recorded in the previous session.

Sensex jumped around 500 points to 77,555 and Nifty gained over 150 points to cross 24,200, as seen at 11.30 am, while the volatility measure India VIX dropped over 4% to 13.17. The optimism was broad-based, with Nifty Midcap 100 and Nifty Smallcap 100 indices rising up to 1%.

UltraTech Cement, Eternal, IndiGo, Axis Bank, Bajaj Finance, Asian Paints, SBI, ICICI Bank and Reliance Industries shares were the top gainers on Sensex, jumping 1-3%. Power Grid and Infosys shares meanwhile dropped over 1% each.

Nifty Financial Services, Nifty PSU Bank and Nifty Private Bank jumped more than 1% each to lead gains, while Nifty IT, Nifty Metal and Nifty FMCG slipped into the red. The overall market breadth was strongly positive, with NSE seeing 2,116 advances and 931 declines, while 107 stocks remained unchanged.

Iran-US conflict escalates

The conflict between Iran and the US continued to escalate in the Middle East. Iran's Islamic Revolutionary Guard Corps has threatened to close "all other export corridors that benefit the U.S. and its allies", Iranian media reported, after Iran shut the Strait of Hormuz and the U.S. reimposed a naval blockade of Iranian ports.

"Regional energy exports are either shared by all, or denied to all," the IRGC said in a statement. The hostilities between Iran and the U.S. re-ignited ⁠last week, fraying an already fragile truce reached in June after several months of fighting that has killed thousands.

US President Donald Trump, meanwhile, threatened to hit Iranian power plants and bridges next week unless Tehran resumes negotiations. "I'll save the energy targets for last, but ultimately we'll hit energy targets," Trump said in an interview with Fox News.

Also read: US issues new Iran-related sanctions and a general license

The escalating conflict rattled oil markets, with Brent crude climbing above $85 a barrel and WTI crude rising to nearly $80 a barrel on Wednesday.

Why is the stock market rising today?

Despite the escalating geopolitical conflict, investors are betting that Donald Trump will once again stop short of allowing the conflict to spiral, keeping faith with Wall Street's so-called TACO (Trump Always Chickens Out) trade. India’s Dalal Street also seems to be ignoring Trump’s notorious flipflop strategy.

"The resilience is because investors are not pricing in a full-blown war in the Middle East. Moreover, markets also appear to be getting accustomed to intermittent geopolitical tensions in the region,” said S Naren, chief investment officer, ICICI Prudential AMC.

Additionally, an unexpected slowdown in US inflation scaled back expectations for the Fed’s interest rate hikes, boosting global markets. The US headline consumer price index fell 0.4% in June, its ⁠first decline ‌since the COVID-19 pandemic, while annualised core inflation of 2.6%, as against expectations for 2.8%. South Korea's Kospi surged 7%, while Japan's Nikkei rose more than 1%.

Dalal Street’s renewed optimism comes amid an overall positive global market sentiment. South Korea’s Kospi surged over 7% while Japan’s Nikkei and Hong Kong’s Hang Seng were up more than 1% each. Taiwan Weighted meanwhile jumped around 2%.

Bank stocks rally

The rise in Indian equities were led by bank and financial stocks. "Improving balance sheets, better liquidity conditions, stable interest rates and moderating credit costs are expected to support stronger growth and mark the beginning of a broad-based earnings upside for financials sector," said Siddhartha Khemka, head of research of wealth management at Motilal Financial Services.

Also read: Analysts pick top bets as ICICI Bank, HDFC, Axis, Kotak, Yes Bank gear up for Q1 results this week

Rupee meanwhile rose 5 paise to 96.11 against the US dollar in early trade on Wednesday despite higher oil prices and FII outflows.

Why some caution is warranted

Despite the renewed optimism, some caution is warranted. With the uncertainties in West Asia continuing and Brent crude trading around $86, there are no positives that can lift the market higher in the near-term, said VK Vijayakumar, Chief Investment Strategist at Geojit Investments.

US President Donald Trump’s notoriously irresponsible comments also continue, this time about a charge on countries for US assistance to ships transiting through the Strait of Hormuz, he noted, adding that Trump soon made a U turn on this, replacing the proposed charge with ‘investments in the US’. With this kind of leadership, total uncertainty has become the new normal, rendering investment decisions extremely challenging, he added.

“In India, there are other challenges like rising CPI inflation (4.38% in June) and deficiency in monsoon which has reached 18%. On the positive side, credit growth in the economy continues to be strong and demand in sectors like automobiles continues to be robust,” Vijayakumar pointed out.

The best strategy during totally uncertain and complex times like these is to remain invested and continue to invest in stocks in growth sectors which are fairly valued, according to the analyst, who said Q1 results of leading banks, NBFCs and auto stocks will be good. Digital platform companies are likely to report good growth numbers, he added.

(With inputs from agencies)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)