India-Pakistan conflict leaves Nifty exposed

Tensions between India and Pakistan have ramped up this week, as a tit-for-tat conflict between the two sides raises fears over a wider clash between the two neighbours over the disputed Kashmir region.

Kashmir has been a huge cause of friction between the two nations since India was split up by the British in the 1940s, with both laying claim to their own areas of this mountainous region. As things stand, Kashmir is split between areas of Indian, Pakistani, and Chinese control. Conflict in the region has been a constant feature, yet since peaking in early 2000s, we saw a significant decline over the years.

However, tensions in the region has been ramped up since a suicide bomber killed 40 Indian paramilitary police officials almost two weeks ago. This spurred on yesterday’s attack from the Indian airforce, with bombs being dropped on a perceived terrorist camp. Finally, we have now seen retaliation from Pakistan, with two Indian jets being shot down and videos circulating of the pilots being physically mistreated.

The question many will wonder is why this matters for financial markets. For many main markets it will not, with the likes of the FTSE 100 and Dow Jones unlikely to sell off as a result. However, with two nuclear nations increasingly shifting towards waging war in one form or another, there is certainly a risk that traders will want to move their money out of the area until we see some clarity on the issue.

Indian stocks have certainly responded to those two recent attacks, with sharp declines seen in the immediate aftermath of each attack. However, we are yet to see a definite sell signal come into play, with a break below the latest swing low (10,721) required to provide a bearish sell signal.

On the wider daily chart, it is evident that the market seems to be rolling over, with a rising wedge formation pointing towards a potential breakdown. The respect on trendline resistance this week alludes to a likely period of weakness over the short term, with a break below 10,590 providing a key bearish signal for the coming weeks.

Ultimately, with tensions between India and Pakistan peaking after decades of relative calm, markets are understandably at risk in the region. With relations in limbo, the decision to escalate or deescalate will be key in determining how stocks move from here.