Asian share markets were hesitant on Monday as the escalating conflict in the Gulf lifted oil prices and fanned fears of inflation, while a packed week of major tech earnings will further test investor faith in the AI trade.
Brent crude climbed 3 per cent to cross $90 a barrel for the first time in more than a month as the US military started a ninth straight day of attacks against Iran, which in turn struck targets across the region.
The jump in fuel costs has revived worries about inflation even as US consumer price data surprised on the downside last week, leading futures markets to price in 29 basis points of Federal Reserve rate hikes by year-end.
“Our forecast is for a more gradual turn toward a Fed hike in 2027, but the balance of risks is shifting in the direction of an earlier hike than expected,” said Bruce Kasman, chief economist at JPMorgan, noting a recent hawkish tilt in Fed policy rhetoric.
Futures imply a 60 per cent chance of a rate rise as early as September, pushing yields on 30-year Treasuries back above the psychological 5.0 per cent barrier. This is a level that tends to attract funds away from equities and toward fixed income, while lifting the valuation bar for future corporate earnings.
The shift has come just as investors question sky-high valuations for chip and AI stocks, which has seen the Philadelphia Semiconductor Index shed 10 per cent last week to leave it 20 per cent down from June’s record high.
Markets took an added blow on Friday when Chinese AI firm Moonshot said it had a new open weight model, Kimi K3, that it says delivers performance approaching US giant Anthropic’s frontier Fable model.
All of which raises the stakes for this week’s rush of profit results, which include Alphabet, Intel and Tesla.
HIGH EXPECTATIONS FOR EARNINGS
BofA analyst Savita Subramanian remains upbeat on the earnings outlook, tipping a 5 per cent beat versus consensus, or 28 per cent growth. Tech is expected to drive over half of growth, with semiconductors expected to rise around 130 per cent year-on-year.
Such forecasts helped S&P 500 futures edge up 0.2 per cent in early trading, while Nasdaq futures firmed 0.4 per cent. In Europe, EUROSTOXX 50 futures and DAX futures both rose 0.2 per cent, while FTSE futures were flat.
Japan’s Nikkei was closed for a holiday, having shed 6.4 per cent last week in a tech-led rout. MSCI’s broadest index of Asia-Pacific shares outside Japan dipped 0.3 per cent.
South Korea’s chip-heavy market lost 0.6 per cent, after diving almost 9 per cent last week in wild trade as retail investors were squeezed out of leveraged positions.
The latest spike in oil will be a headache for the European Central Bank which meets on Thursday and is considered likely to hold rates at 2.25 per cent following June’s hike.
Markets are almost fully priced for a rise at its September meeting and rates of 2.75 per cent early next year.
The euro was flat at $1.1433, having spent more than a week trading between $1.1377 and $1.1482. The dollar was steady at 162.41 yen, just below the recent 40-year peak of 162.84 as Japanese authorities flag the threat of intervention should the yen weaken quickly.
In commodity markets, the rise in yields pressured non-interest-paying gold which fell 0.6 per cent to $3,993 an ounce.
