- The decline of Brent crude below $100 this morning has given Indian equities and the Sensex index a much-needed reprieve.
Current Setup
Bias: CAUTIOUSLY BULLISH above 74,500.
The Sensex index is seeing fresh demand after receiving support from declining crude oil prices, lower US bond yields and a slight improvement in global risk appetite. However, the 75,000 price mark remains a solid barrier for the bulls.
The BSE Sensex is currently trading around 74,700–75,000. A higher open did not translate into strong gains, as it gave back some these earlier gains following an IT stock selloff mid-session. Reuters reports monitored the index as having attained as high as 74,968.68 in early morning trading, before slipping to 74,529 as of writing.
With 75,500 now serving as a confirmed resistance, the index must achieve a sustained break above 75,000 to establish more powerful upside momentum.
Sensex Index: Current Macro Drivers
1. Falling oil prices
The decline in Brent crude prices to $99 as of writing has cut India’s import burden and reduced expecations of imported inflation. Both factors are beneficial to the rupee. This decline is more of a relief retracement rather than a reversal. Reports of escalated fighting between Saudi forces and the Houthis within the hour indicate a potential for a renewed push above $100. The situation is still fluid, so this reduction in oil prices has not eliminated the oil shock risk premium.
2. Lower US Treasury yields
Risk appetite is slowly returning following the decline in US Treasury yields. Indian equities listed on the Sensex index are also beneficiaries. Despite the global backdrop improving marginally, India’s equity market remains sensitive to any changes in the US bond yields and the USD/INR currency valuation.
3. IT Stocks Selloff
The Nifty IT index fell 0.9% as CLSA and Goldman Sachs highlighted caution in the medium-term earnings expectations amid subdued demand. The potential for the RBI to hike rates due to inflationary impact of the geopolitical situation poses a near-term risk to tech sector earnings. The Sensex index is vulnerable to this factor due to the significant weighting that listed large IT stocks have on the index.
Senses Index Forecast Scenarios
Base case→ Consolidation: The 74,000–75,500 price range is the consolidation area as investors try to balance out the oil price decline with Fed hawkish expectations and renewed weakness in the IT-sector.
Bull case→ Recovery: Confirmation of a break above 74,500 takes the Sensex index to the 75,000–75,500 price area initially. This move is supported by further oil-price declines and stabilization of US Treasury yields. A further push towards 76,000–76,500 cannot be ruled out in this case.
Bear case→ Further Decline: A rebound in Brent crude beyond $105 and a rise in US bond yields could stoke a further selloff. Deterioration in the geopolitical situation worsens the case for Sensex, with a selloff triggering a breakdown of 74,000 and exposing 73,500 or 73,000.
Price Catalysts
- Brent crude: Due to India’s exposure to oil price changes, Indian equities are directly impacted by Brent crude’s rapid price moves due to the geopolitical risk premium.
- USD/INR: rupee stability makes Indian equities attractive, usually under conditions of lower oil prices.
- US Treasury yields: Rising bond yields make the US Dollar more expensive relative to the rupee. Since oil prices and indeed, international trade are priced in dollars, any move above the 5% threshold by US bond yields would put on the Sensex.
- IT earnings expectations: India’s IT sector was hit by the dropoff in international demand earlier in the year. If the situation persists, it could lead to further IT stock downgrades, limiting any recovery on the Sensex.
- US-Iran diplomacy: Indian stocks are at a point where any form of credible de-escalation would be a positive development. But further deterioration would expose the Sensex to a further decline.
Technical Outlook
Price is now in consolidation between the 74000 support and the 75,480 barrier (high of 15 September). A breakdown of 74,000 unlocks access to the 71550 support mark, site of the 2 April low. This move completes the rising wedge on the daily chart.
Otherwise, a break of 75480 uncaps the upper boundary of the current range and unlocks access to upside targets at 80,500 (2 March high and major resistance). Before then, a potential pitstop exists at 76,600 (the high of 3 September) and 79,000 (4 August high).