Asian equities advanced on Monday after signs of easing tensions in the Gulf triggered a sharp decline in oil prices, easing inflation concerns and lifting expectations that major central banks will keep interest rates unchanged this week.
The improvement in market sentiment followed indications that hostilities between the United States and Iran may be de-escalating, although investors remained cautious as attacks by Yemen’s Iran-backed Houthis underscored that geopolitical risks in the Middle East remain elevated.
Iran said on Sunday it would suspend its attacks as long as the United States did the same, while reports suggested the U.S. military was becoming increasingly concerned about dwindling ammunition supplies after weeks of conflict.
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However, the Houthis launched attacks on Saudi oil facilities along the Red Sea coast, highlighting that threats to global energy infrastructure have not disappeared. The Red Sea remains one of the world’s most important maritime trade routes for crude oil and refined petroleum products, meaning any disruption could quickly reignite concerns about global energy supplies.
Even so, financial markets focused on the broader reduction in tensions surrounding the Strait of Hormuz, through which roughly one-fifth of the world’s seaborne oil exports pass.
“Net, it looks as if developments in the Middle East have moved in a positive direction over the weekend, adding some credibility to the notion that oil above $100 a barrel seems to induce de-escalatory behavior from both sides,” said Sally Auld, Group Chief Economist at National Australia Bank (NAB).
The easing geopolitical risk prompted a broad retreat in crude oil prices.
Brent crude futures fell 4.7% to $92.27 a barrel, while U.S. West Texas Intermediate crude dropped 5.0% to $84.89 a barrel. The sharp decline provided investors with relief after recent concerns that higher energy prices could reignite inflation and complicate the outlook for monetary policy.
Lower oil prices reduce transportation, manufacturing and consumer energy costs, potentially slowing inflation and easing pressure on central banks to tighten monetary policy further.
Bond markets responded positively, with investors increasing purchases of government debt.
The yield on the benchmark 10-year U.S. Treasury note fell four basis points to 4.63%, reflecting expectations that lower energy prices could lessen inflationary pressures over the coming months.
The decline in oil also prompted traders to modestly reduce expectations that the Federal Reserve could raise interest rates this week.
The U.S. central bank concludes its policy meeting on Wednesday, with futures markets pricing roughly a one-in-three probability of another rate increase. Nevertheless, most economists expect policymakers to leave rates unchanged, citing softer inflation data released in June.
Attention will also focus on comments from Federal Reserve Chair Kevin Warsh, whose views on the appropriate policy path have remained less clearly defined than those of several other officials.
“Investors see the outcome of the July meeting as unusually uncertain, likely because the Fed has been split recently, Warsh’s own position remains unclear, and some of the re-escalation with Iran occurred during the blackout period,” analysts at Goldman Sachs said.
“There will likely be at least one dissent in favor of a hike, but most voters appear unlikely to push for a move this week after the softer June inflation data.”
Beyond the Federal Reserve, investors face one of the busiest weeks of the year for monetary policy.
The Bank of England announces its policy decision on Thursday, while the Bank of Japan meets on Friday. Both central banks are widely expected to leave interest rates unchanged while maintaining cautious guidance given persistent uncertainty over inflation and global growth.
The prospect of stable monetary policy, combined with easing energy prices, lifted equity markets across the region.
Japan’s Nikkei 225 rose 0.2%, South Korea’s technology-heavy benchmark gained 0.2%, and MSCI’s broad index of Asia-Pacific shares outside Japan advanced 0.5%.
Chinese blue-chip stocks added 0.3%, supported in part by a strong debut from memory chipmaker CXMT Corp., whose shares surged 500% after raising $8.6 billion in the largest initial public offering in Asia this year.
The gains extended to futures markets in the United States and Europe.
S&P 500 futures climbed 0.8%, while Nasdaq futures rose 1.3% as lower Treasury yields boosted appetite for growth stocks, particularly technology companies whose valuations are sensitive to borrowing costs.
European markets also pointed higher, with EURO STOXX 50 futures rising 0.8%, Germany’s DAX futures advancing 0.9% and FTSE futures adding 0.2%.
Investor attention is now shifting toward one of the busiest corporate earnings weeks of the year. Roughly one-third of S&P 500 companies are scheduled to report quarterly results, with analysts expecting aggregate earnings growth of 26.5% from a year earlier, according to LSEG IBES data.
Several of the world’s largest technology companies, including Microsoft, Meta Platforms, Amazon, Apple and Qualcomm, are due to release results over the coming days. Their reports are expected to provide crucial insight into enterprise AI spending, cloud computing demand, consumer technology sales and whether massive investments in artificial intelligence are beginning to generate meaningful financial returns.
Expectations remain exceptionally high, however.
Investors have increasingly questioned whether escalating AI capital expenditures can continue to deliver sufficient returns to justify soaring infrastructure costs. As a result, even earnings that exceed analysts’ forecasts may not be enough to drive share prices higher if companies fail to demonstrate progress toward monetizing their AI investments.
The scale of AI spending was highlighted by a Wall Street Journal report that Nvidia is discussing providing approximately $250 billion in financing support for OpenAI as part of a major data center development project. The report reveals the unprecedented levels of capital flowing into AI infrastructure as technology companies race to secure computing capacity.
Economic data released this week will also shape market expectations for the second half of the year.
In the United States, investors will closely monitor advance second-quarter gross domestic product data, where economists expect annualized growth to accelerate to 1.5% following a weak first quarter. Additional reports include the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, along with personal income, consumer spending, weekly jobless claims, the Employment Cost Index and the University of Michigan’s consumer sentiment survey.
In Europe, attention will focus on preliminary second-quarter GDP figures, July inflation data, economic sentiment, consumer confidence and unemployment, all of which will provide fresh insight into the euro zone’s economic momentum.
Currency markets reflected the improved risk environment.
The euro gained 0.3% to $1.1408, while the U.S. dollar slipped 0.2% against the Japanese yen to 163.54 as declining Treasury yields reduced support for the U.S. currency.
Elsewhere in Asia, the Singapore dollar strengthened after the Monetary Authority of Singapore unexpectedly tightened monetary policy by allowing a slightly faster pace of currency appreciation, signaling confidence in the country’s inflation outlook.
Indonesia’s rupiah weakened after the unexpected resignation of the country’s central bank governor, a development that analysts said could unsettle investors concerned about monetary policy independence and fiscal discipline.
In precious metals markets, gold rose 1.3% to $4,103 an ounce. The decline in Treasury yields increased demand for the non-interest-bearing asset, while lingering geopolitical uncertainty continued to support safe-haven buying.
Although markets welcomed the easing in Middle East tensions, investors remain alert to the possibility of renewed volatility. Analysts warn that any escalation involving the Strait of Hormuz or further attacks on critical energy infrastructure could quickly reverse the decline in oil prices, complicate the inflation outlook and alter expectations for central bank policy.
However, this week’s earnings reports and policy decisions are expected to determine whether optimism surrounding artificial intelligence and the broader global economy can sustain the recent rally in equities.