Asian equity markets began the new quarter in a cautious tone on Wednesday, as diplomatic talks between the United States and Iran encountered fresh obstacles while the yen tumbled to levels not seen in decades. Tehran stated on Tuesday that it would not meet with senior U.S. envoys who had travelled to the region, leaving the two sides distant from an agreement that would fully reopen the Strait of Hormuz.
Bond markets faced selling pressure after a sharp move higher in U.S. Treasury yields overnight narrowed the chances of the Federal Reserve pausing its tightening cycle. Futures markets tightened the odds of rate increases ahead of key U.S. employment data due on Thursday. Market participants will also be focused on any remarks from Fed Chair Kevin Warsh, who is scheduled to appear at a European Central Bank conference later in the session and could signal the need for further policy tightening. Traders note, however, that Warsh has historically been opposed to the Fed offering forward guidance and may avoid providing explicit cues.
At present, futures indicate a roughly 33% probability of a Fed rate increase at the next meeting later this month, while a move in September is priced at about 70%. Equity investors are counting on a robust earnings season to offset rate risks and continue to favour technology, piling into related trades ahead of corporate results.
Japan's Nikkei extended its rally, rising another 1.0% on the session after surging 37% in the previous quarter. The strong appetite for technology helped lift sentiment among large manufacturers to levels not seen since 2018, according to a closely watched survey released on Wednesday. A separate survey showed manufacturing delivered its best quarter since 2014 as new orders jumped.
South Korea's main index eased 1.4% on the day, following an extraordinary 68% increase in the second quarter driven by booming AI-related demand for semiconductors. MSCI's broadest index of Asia-Pacific stocks outside Japan was little changed.
In Europe, EUROSTOXX 50 futures and DAX futures were flat, while FTSE futures dipped 0.2%. On Wall Street, S&P 500 futures and Nasdaq futures each eased about 0.1% after posting solid gains overnight.
Earnings and the market backdrop
Market participants described a pause in risk-taking as reasonable given that U.S. equities had just recorded their strongest quarter since 2020, supported by a dramatic 88% rise in the Philadelphia Semiconductor Index. Chris Weston, head of research at broker Pepperstone, noted that historical patterns tend to favour bulls and highlighted that, since 2008, Nasdaq futures have produced only one negative July. He added that the upcoming earnings season will be critical in assessing whether earnings expectations continue to improve and whether portfolio allocations keep shifting toward technology.
Major banks are due to begin reporting from mid-July, and analysts hold elevated profit expectations for the technology sector and more broadly. To justify current valuations in the face of higher bond yields and a potential increase in the cash rate, markets will require strong corporate results.
Bond yields, currencies and commodities
Yields on 10-year U.S. Treasuries were at 4.55%, after jumping nearly 9 basis points in the previous session. The rise in yields contributed to an extended dollar rally and pushed the yen to a fresh four-decade low at 162.715 per dollar, continuing a strengthening move that began in early May.
The yen's slide has prompted the usual rhetoric about possible intervention from Tokyo. Yet authorities appear reluctant to take further action after spending almost 12 trillion yen through April and May with limited sustained impact. Tim Baker, a macro strategist at Deutsche Bank, observed that the recent move largely reflected dollar strength rather than significant yen weakness, noting the yen had been broadly steady versus other major currencies for months. Baker also pointed to the benefit Japan receives from lower oil prices as a net energy importer and noted a slight widening in real yield spreads that favoured the yen. He said the fair value model has fallen to the low 150s and suggested that policymakers may be waiting for dollar strength to abate, implying limited further yen downside from here.
The euro was essentially flat at $1.1409, sitting just above a recent 13-month trough of $1.1325. European Union inflation data due later in the session are forecast to show a dip to 3.0% in May from 3.2% in April, with further declines likely as lower oil prices work through the system. Market pricing now assigns only a 32% chance of an ECB rate rise in July, and implies that one more lift to a 2.5% policy rate could mark the end of this tightening cycle.
In commodity markets, Brent crude traded up 0.5% at $73.31 a barrel, well down from its May peak of $126.41. U.S. crude rose 0.7% to $69.96 a barrel. Gold remained out of favour after a difficult quarter, slipping 0.4% to $3,990 an ounce.
Market implications
Investors are weighing a combination of geopolitical risk, central bank policy uncertainty and the earnings calendar. Technology and semiconductors remain focal points for equity allocations, while currency moves and rising yields are shaping decisions across fixed income and export-sensitive sectors. The sequence of Fed commentary, U.S. employment data and upcoming corporate reports will be watched closely for signals about the path of rates and the durability of recent equity gains.