The Indian stock market is likely to remain sensitive to global cues next week, with crude oil prices, rising bond yields, stronger-than-expected US jobs data and foreign investor flows emerging as key factors that could shape investor sentiment. Renewed tensions between the US and Iran, uncertainty over the reopening of the Strait of Hormuz and shifting expectations around US interest rates are expected to keep volatility elevated.
The benchmark indices ended higher on Friday, but surrendered most of their intra-day gains and closed near the day’s lows after the closing auction session (CAS). The Sensex gained 363 points to close at 76,515, while the Nifty rose more than 24 points to finish below the 23,898 mark.
The broader market performance remained mixed, with the Nifty Midcap 100 slipping into negative territory, while the Nifty Smallcap 100 managed to end in the green.
One of the biggest concerns for investors heading into the new week is the renewed rise in crude oil prices. Oil gained around 8 per cent during the week after the US and Iran exchanged strikes following a month-long lull, reviving fears of a supply disruption as the Strait of Hormuz remains shut for oil transit.
The prolonged disruption has also prompted a reassessment of crude price expectations. Citi has raised its average Brent crude price forecast for the third quarter to $86 a barrel from its earlier estimate of $80, citing expectations of a longer-than-anticipated timeline for the reopening of the Strait of Hormuz.
Higher oil prices could put additional pressure on inflation and corporate costs in oil-importing economies such as India. Investors will therefore closely monitor developments in the Middle East and any indications of when normal oil shipments through the strategic waterway could resume.
Another major concern is the sharp rise in global bond yields. A bond-market selloff of a scale not seen in decades has pushed yields across several major economies to multi-year highs. Markets are currently dealing with a combination of oil-driven inflation, expectations of tighter monetary policy and deteriorating fiscal conditions.
The rise in crude prices and fuel costs has increased inflationary pressures while also pushing up government borrowing costs globally. At the same time, investors are assessing the possibility that tighter financial conditions could weigh on economic growth if there is no meaningful easing in inflationary pressures.
US monetary policy expectations could add another layer of volatility. A stronger-than-expected US jobs report has brought the possibility of a September interest-rate hike back into focus, creating a difficult policy choice for Federal Reserve Chair Kevin Warsh amid pressure from US President Donald Trump for lower borrowing costs.
US employers added 162,000 jobs in August, almost three times the number expected by economists. The labour force participation rate also increased to 61.6 per cent. Despite the larger pool of available workers, the unemployment rate remained at 4.1 per cent.
