Asian financial markets began the Tuesday session with measured trading and reduced liquidity as several regional bourses observed Lunar New Year holidays. Mainland China, Hong Kong, Singapore, Taiwan and South Korea were closed for the holiday, while U.S. markets had been shuttered on Monday for Presidents' Day. Against that subdued backdrop, oil climbed on the prospect of fresh U.S.-Iran nuclear talks scheduled to start later in the day in Geneva.
Equities were mixed where trading took place. Japan's Nikkei slipped 0.5% and the broader Topix fell 0.2% to 3,779.29. In contrast, Australia's S&P/ASX200 was trading about 0.5% higher in early trade.
Government bond markets saw yields move lower. The 10-year U.S. Treasury yield eased by 1 basis point to 4.044%, a level described as the lowest since early December. Japan's five-year yield fell 2 basis points to 1.65%, its weakest since February 2. In early Asian hours, futures pointed to a mixed U.S. open, with Nasdaq futures down 0.1% and S&P 500 futures up 0.2%.
The dollar index, which measures the U.S. currency against a basket of peers, was last unchanged at 97.07 after a modest 0.2% gain overnight. The Japanese yen strengthened slightly, appreciating 0.15% versus the dollar to 153.28 per dollar.
Investors were also focused on Japan's economic data. On Monday, Japan reported fourth-quarter GDP that expanded at an annualised pace of 0.2%, well below the 1.6% gain that had been expected, with government spending cited as a drag on activity. The softer-than-anticipated outturn was seen as a fresh policy challenge for Prime Minister Sanae Takaichi and as support for her push toward more assertive fiscal measures, according to economists cited in market commentary.
Market expectations around monetary policy had shifted modestly following the GDP release. The Bank of Japan is due to meet on rates in March, but traders were pricing only a slim chance of a rate increase at that meeting. A Reuters poll of economists conducted last month had pointed to the BOJ waiting until July before tightening again. In a research note, NAB analysts wrote: "The market has likely assumed that softer GDP data in the fourth quarter will encourage PM Takaichi’s plans to offer additional fiscal support and reduce the sales tax on food. Pricing for BoJ rate hikes nudged a little lower post the GDP data, with only 4 basis points priced for the March meeting and 16 basis points priced for April."
In Australia, the Reserve Bank said on Tuesday that it had concluded inflation would remain stubbornly high if it had not raised interest rates as it did earlier this month, and that it was not yet certain whether additional tightening would be required.
Commodities saw notable moves. Oil advanced ahead of the U.S.-Iran talks and against a backdrop of expected OPEC+ supply increases. U.S. West Texas Intermediate crude rose 1.29% while Brent crude futures were up 1.33% overnight. The timing of the diplomatic engagement appeared to be a key driver after reports that Iran's Revolutionary Guards navy conducted a drill in the Strait of Hormuz on Monday - a waterway responsible for roughly 20% of global oil shipments.
Market strategists flagged that geopolitical risk continues to influence energy markets. ANZ analysts said: "The market remains unsettled by geopolitical uncertainties, with investors cautious due to the pending US-Iran and Ukraine negotiations this week. Speculative positions have been increasing in recent weeks. If tension in the Middle East eases or meaningful progress is made on the Ukraine war, the risk premium currently built into oil prices could swiftly unwind."
Precious metals lost ground as the dollar recovered. Gold fell 0.85% to $4949.5 per ounce, with spot silver down about 2%, pressured by the firmer greenback which makes dollar-priced bullion more expensive for holders of other currencies.
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