Asian equity markets opened higher on Tuesday as investors sought to extend a short-lived rebound while digesting a dense central bank schedule and the ongoing conflict between the United States and Iran. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.9% in early trade, with South Korea’s Kospi leading advances at 2.4%. Japan’s Nikkei 225 was up 0.3%.
U.S. futures, by contrast, pointed to a modest pullback, with S&P 500 e-mini contracts down 0.3%. On Wall Street on Monday the S&P 500 climbed 1.0%, snapping a four-day losing streak on strength in AI-related stocks, though the index remained about 3% below its level before the conflict began.
Market participants remained cautious about the durability of the rally. Chris Weston, head of research at Pepperstone Group Ltd in Melbourne, said the move higher still "has the feel of a positioning squeeze rather than the start of a new directional trend," and added he remained reluctant to buy dips at this stage.
Commodities reacted to developments in the Gulf. Brent crude added 2.7% to reach $102.89 a barrel after several U.S. allies declined a request by U.S. President Donald Trump to dispatch warships to escort tankers through the Strait of Hormuz, a crucial corridor that handles about a fifth of global energy shipments.
Central banks dominated the policy calendar. The Reserve Bank of Australia was due to announce its latest interest rate decision at 0330 GMT on Tuesday. A Reuters poll of economists expected the RBA to tighten for a second time this year to 4.1%. The RBA is the first of several major central banks to meet this week, preceding the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan - each of which will assess the economic consequences of the Iran war even though they are broadly anticipated to hold policy steady.
On the question of how policymakers should respond to the energy price shock, the Bank for International Settlements urged caution, recommending against hasty policy moves and describing the episode as a textbook instance in which to "look through" a supply shock.
Market-implied odds suggested the Federal Reserve was likely to pause. Fed funds futures showed an implied 99.1% probability that the U.S. central bank would remain on hold at the conclusion of its two-day meeting on Wednesday, according to the CME Group’s FedWatch tool. Steve Englander, global head of G10 FX research at Standard Chartered in New York, said the FOMC "is likely to defer action until it becomes clear whether the output or price effects are dominant," and added that the committee would probably avoid indicating a strong directional view on the war’s impact given the uncertainty over its duration and whether activity or inflation would be more affected.
Fixed income and currency markets moved cautiously. The yield on the U.S. 10-year Treasury rose 1.8 basis points to 4.236%. The U.S. dollar index, which tracks the greenback against six major currencies, inched up 0.1% to 99.963 after breaking a four-day winning streak on Monday.
In currency markets, the Japanese yen weakened 0.2% to 159.415 per dollar, approaching but remaining just short of the psychologically important 160 per dollar threshold despite verbal warnings from Japanese authorities. Analysts noted that the threshold for intervention may be rising amid higher oil prices. Separately, Bank of Japan Governor Kazuo Ueda said underlying inflation was gradually accelerating toward the central bank’s 2% target.
Precious metals and cryptocurrencies showed mixed moves. Gold held steady, up 0.1% at $5,011.53. Bitcoin rose 2.0% to $75,705.24, while ether increased 0.7% to $2,362.25.
Summary
Asian markets attempted to build on recent gains as investors balanced a crowded central bank schedule against the economic uncertainty stemming from the U.S.-Iran conflict. Oil spiked on the prospect of supply disruption through the Strait of Hormuz, while central banks - starting with the RBA - prepared policy decisions that will be watched for any sign of reaction to rising energy costs. Major central banks including the Fed are expected to largely remain on hold while assessing whether the shock will chiefly affect activity or inflation.
Key points
- Regional equities rose: MSCI Asia-Pacific ex-Japan +0.9%, Kospi +2.4%, Nikkei 225 +0.3% - sectors impacted include financials and technology where stock moves contributed to index performance.
- Oil and energy markets reacted to geopolitical developments: Brent crude +2.7% to $102.89/bbl - this pressures energy and transport sectors given the Strait of Hormuz’s role in global shipments.
- Central bank focus: RBA decision expected to raise rates to 4.1%, setting the tone ahead of the Fed, ECB, BoE and BoJ - monetary policy-sensitive sectors such as banking and real estate are in focus.
Risks and uncertainties
- Escalation of the U.S.-Iran conflict could further lift oil prices and disrupt trade routes - energy, shipping and broader inflation-sensitive sectors would be affected.
- Policy ambiguity from central banks facing a supply-driven energy shock - financial markets and interest-rate-sensitive sectors may experience volatility if policymakers change their stance.
- Market dynamics may reflect a short-term squeeze in positioning rather than a sustained trend - equity and derivatives markets could see abrupt reversals if sentiment shifts.
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