Global Markets Waver: Asian shares faced a downturn on Monday, as concerns of a potential escalation in Middle East tensions cast a shadow over market sentiment. This week is marked by a wealth of data on U.S. economic growth and inflation, along with earnings reports from major tech companies.
Meanwhile, bond markets were feeling the pressure as U.S. 10-year Treasury yields inched perilously close to the 5.0% mark. This upward trend in yields has sent borrowing costs climbing on a global scale, challenging equity valuations.
Over the weekend, Washington issued a warning regarding significant risks to U.S. interests in the Middle East. Israel’s actions in Gaza and rising tensions on the Lebanon border added to concerns. In addition to these geopolitical developments, the European Central Bank and Bank of Canada were preparing for policy meetings, with investors keeping a close eye on any hints about future policy moves.
Remarkably, the surge in bond yields has tightened monetary conditions without the necessity of central bank actions, leading the Federal Reserve to signal that it’s likely to maintain its current stance during its upcoming policy meeting. In fact, futures contracts indicate around a 70% likelihood that the Fed’s tightening cycle has come to an end, with discussions even touching on the possibility of rate cuts starting in May next year.
The upswing in yields has put pressure on equity valuations, resulting in a decline in major indices last week. The VIX, a measure of U.S. stock market volatility, reached its highest level since March.
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On Monday, MSCI’s broadest index of Asia-Pacific shares, excluding Japan, dropped 0.4%, reaching its lowest point in nearly a year. China’s blue-chip index lost 0.7%, marking its weakest performance since early 2019. Japan’s Nikkei and South Korea’s market both saw 0.4% declines.
European futures remained relatively stable, while S&P 500 and Nasdaq futures displayed slight gains, buoyed by expectations of support from a flurry of earnings reports scheduled for the week.
Tech giants like Microsoft, Alphabet, Amazon, and Meta Platforms are among the key players reporting this week, with IBM and Intel also on the docket.
Economic growth appears robust, with U.S. GDP figures expected to show annualized growth of 4.2% this week, potentially even reaching as high as 7% in nominal growth. The strong consumer demand is anticipated to bolster corporate profits.
This outperformance has lent strength to the U.S. dollar, although the risk of Japanese intervention has temporarily capped its ascent around 150.00 yen. Yields in Japan are also on the rise as the Bank of Japan discusses potential tweaks to its yield curve control policy.
The euro held steady at $1.0582, while the Swiss franc remained strong at 0.8927 per dollar, benefiting from safe-haven flows in recent weeks.
Gold, too, continues to draw safe-haven interest, standing at $1,970 an ounce, its highest level since May.
Oil prices experienced a slight pullback, with Brent down 73 cents at $91.43 a barrel, and U.S. crude easing 82 cents to $87.26. Market dynamics are being closely watched for any disruptions in Middle East supplies.
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