The S&P BSE Sensex which slipped by a little over 2 percent last month could well retest its crucial support near 30,000 if geopolitical tensions between North Korea, US, and its allies.
There are many news reports which have surfaced over the weekend which has led to a risk off sentiment among the market participants. Markets across the globe including India started on a weaker note after North Korea conducted its sixth and most powerful nuclear test on Sunday.
North Korea said that it was of an advanced hydrogen bomb for a long-range missile, prompting the threat of a "massive" military response from the United States if it or its allies were threatened, said a Reuters report.
North Korea's latest nuclear test fuelling buying in safe havens. Indian markets suffered a knee jerk reaction which led to 300-point fall in Sensex, and over 100 points fall in the Nifty50 after South Korean defence minister said North Korea may be preparing for an ICBM launch.
The Nifty50 has now slipped below its crucial support level of 9,900 and a close below 9,820 would lead to further selling in the markets.
“Over the past couple of months, global markets are near their highs and any escalations or tension especially military confrontation between nuclear states like North Korea, US, and its allies could bring a lot of uncertainties in the market,” Abhimanyu Sofat, Vice President, Research at IIFL told Moneycontrol.
“The special relationship between North Korea and China will also be tested in case of such military confrontation. One may see a 4-5 percent kind of correction in the market if the situation escalates,” he said.
A 4-5 percent fall from current levels could take the Sensex towards its crucial support level of 30,000 while for the Nifty, it would be somewhere closer to 9,400.
The Nifty50 which was trading above its crucial short term moving averages on Friday broke below its three crucial moving averages of 5-days exponential moving average (DEMA), 13-DEMA and 20-DEMA in intraday trade.
One major factor which could weight on D-Street is persistent selling by foreign institutional investors (FIIs). They turned net sellers in the previous month. In August, overseas investors pulled out USD 2 billion from stock markets while they pumped in USD 2.40 billion in debt.
“FPI’s have always been sensitive to global cues and we don’t see this changing in the near future given the prevailing tensions between the US and North Korea,” Sumeet Bagadia, Associate Director, Choice Broking told Moneycontrol.
“Therefore, we are of the view that FIIs will remain negative on all emerging economies until there is an amicable resolution between these two countries,” he said.
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