Asian shares tread carefully as new US strike on Iran boosts oil prices
Asian shares exhibited caution on Thursday as reports of a new US military strike in Iran tempered investor optimism regarding a potential near-term peace agreement. Concurrently, US inflation data presented a looming concern for bonds and interest rates. Oil prices experienced a 2 percent increase, while Treasury yields saw a slight uptick as the strike contributed to the mixed signals surrounding the negotiations, following President Donald Trump’s rejection of an Iranian report suggesting a deal to resume traffic through the Strait of Hormuz. “Over the next 2 weeks, we expect either a deal for a new ceasefire, or the current ceasefire will have collapsed with active hostilities resuming,” said Madison Cartwright. He assigned a 70 percent probability to the likelihood of a deal being reached, while noting that the outcome regarding the strait remains uncertain. “Insurance through the strait has become prohibitively expensive, and it is unclear how and at what price insurance will be made available,” he added.
It remains uncertain whether Iran will impose a toll or a fee under a different designation. With transits of the strait still only at a trickle, Brent crude rebounded 2.3 percent to $96.50 a barrel, while US crude added 2.2 percent to $90.59. Yields on 10-year notes increased by 2 basis points to 4.502 percent, as the persistent risk of elevated oil prices exerted upward pressure on inflation expectations. It also dampened the momentum of the tech-driven bull run in equity markets, with Japan’s Nikkei declining by 0.2 percent, while South Korean shares remained unchanged. MSCI’s broadest index of Asia-Pacific shares outside Japan experienced a decline of 0.1 percent. Reports from Japan indicated that the government intended to issue “bridging bonds” to finance key initiatives designed to enhance investment in growth and economic security. In Europe, EUROSTOXX 50 futures and DAX futures both experienced a decline of 0.2 percent, whereas FTSE futures decreased by 0.3 percent. S&P 500 futures and Nasdaq futures increased by 0.1 percent. The focus now shifts to US data on personal consumption expenditures, which encompass the Federal Reserve’s preferred measures of inflation.
The pulse from fuel is anticipated to elevate the headline PCE to a three-year peak of 3.8 percent, while the core is projected to increase by 0.3 percent, reaching an annual rate of 3.3 percent, significantly exceeding the Fed’s 2 percent target. The recent pick-up has prompted an increasing number of Federal Reserve members to advocate for the removal of its easing bias, or even to consider the possibility of a rate hike. With inflation significantly exceeding the target, yet the growth implications of the conflict remaining ambiguous, analysts at NAB contend that the Fed is confronted with authentic two-sided risks. We observe that uncertainty supports the rationale for maintaining rates until the end of 2027, while a strengthening in services core inflation would bolster the argument for a prolonged period of elevated rates. Conversely, a significant moderation would redirect focus toward the nascent growth challenges. Markets suggest an equal probability of a quarter-point increase in the funds rate, positioning it within a range of 3.75-4.0 percent by the end of the year.
The shift in Fed expectations has contributed to the stability of the US dollar, which was trading at 99.291 against a basket of currencies, maintaining its position over the week. The dollar advanced to a four-week high against the yen at 159.57, approaching the 160.00 threshold that has historically prompted Japanese forex intervention. The euro was slightly lower at $1.1620, although it benefits from expectations that the European Central Bank will raise interest rates during its meeting in June. Speaking on Thursday, ECB Chief Economist Philip Lane underscored the necessity of averting the transmission of rising energy costs into elevated inflation expectations. In commodity markets, gold declined by 0.3 percent to $4,445 an ounce, continuing to experience limited support as a safe haven or as a hedge against inflation risks.
