Asia stocks adrift as Middle East worries meet rate-hike bets

SINGAPORE: Asian stocks wobbled on Monday after Iran and the United States agreed to halt renewed hostilities that had cast a shadow over an interim peace deal and supported oil prices, while the dollar stood near a one-year high on rate-hike bets.

A return to diplomacy in the Middle East would follow several days of tit-for-tat strikes since an Iranian projectile hit a cargo vessel in the Strait of Hormuz last week, with both sides accusing each other of breaking an interim ceasefire.

Futures for S&P 500 and Nasdaq gained 0.5% while European futures rose 0.13%, pointing to a steady open.

Asian markets though were under pressure, with South Korea’s KOSPI down nearly 2% and Japan’s Nikkei slipping 1%, leaving MSCI’s broadest index of Asia-Pacific shares down 0.3%.

“It feels like we are lacking a bit of direction,” said Nick Twidale, chief market strategist at ATFX Global in Sydney.

“We may get a shot in the arm later today from more positive news out of the Middle East… but at the moment I think it’s going to be a bit of a flow-driven day without major moves to either side,” Twidale said.

Worries over the future of the peace deal lifted oil prices, which have given up almost all of their war-driven gains as markets quickly reprice the prospect of easing supply.

On Monday, Brent crude futures pared early gains to trade 0.5% higher at $72.37 a barrel while US West Texas Intermediate crude rose 1% to $69.92 a barrel.

The 14-point interim peace accord agreed on June 17 was meant to halt the fighting, which the US and Israel started on February 28, and reopen the critical strait while talks proceeded on issues such as Iran’s nuclear programme.

“Markets have grown accustomed to the oscillations in US-Iran talks,” said Vasu Menon, managing director of investment strategy for OCBC.

“We are moderately constructive on the investment outlook for the second half of the year given the abundance of liquidity on the sidelines and the decent news flow on the economic and earnings fronts,” he said. 

Tech worries linger

Investors have also been battling concerns that valuations for AI-related firms have become stretched following years of gains, with Micron’s strong earnings forecast and Apple’s price hikes last week underscoring the contrasting challenges.

Markets are undergoing a tactical rotation away from mega-cap AI into smaller, more cyclical segments, marking early signs of broadening after extreme concentration, strategists at BofA Global Research said in a note.

The Bank for International Settlements cautioned over the durability of the current AI investment surge, noting supply bottlenecks and intense competition could spur the kind of overinvestment seen in previous boom-and-bust cycles.

Jose Torres, senior economist at Interactive Brokers, said the rising costs tied to modern infrastructure have firms scrambling for cash on their balance sheets and adding to risks if those investments fail to deliver.

“For this reason, traders have gravitated toward the defensive and cyclically oriented areas of the equity space in recent weeks,” Torres said. 

Rising rate hike wagers

Easing oil prices may help reduce some inflation pressure but elevated prices are likely to keep the US Federal Reserve under pressure to raise rates.

Investors are pricing in at least one hike this year, a sharp reversal from expectations of two rate cuts before the conflict began.

BofA strategists anticipate three hikes, a more hawkish view that reflects a firmer labour backdrop, the new Fed Chair Kevin Warsh and a persistent inflation problem. Rising odds of a rate hike have lifted the dollar.

The dollar index, which measures the US currency against six other units, was at 101.33, just below the one-year high it touched last week.

The Japanese yen was languishing at 161.77 per US dollar as fears of another bout of intervention from Tokyo kept the fragile currency from breaking through its lowest in 40 years.

The rising dollar has weighed on gold, which was down 0.87% at $4,052.96 per ounce.

The yellow metal is set for a 13% decline in the second quarter, its biggest quarterly drop since 2013.