Global markets started Tuesday on a cautious note as investors remained wary of escalating tensions in the Middle East, while oil prices stayed high. Meanwhile, anticipation builds for China’s market reopening after an extended holiday period.
In early Asian trading, the yield on the U.S. 10-year Treasury note held steady above 4%, reflecting strong U.S. labor market data that have tempered expectations for aggressive interest rate cuts by the Federal Reserve.
On Monday, Hezbollah launched rockets at Israel’s northern city of Haifa, and Israel appeared prepared to intensify its operations in Lebanon. The heightened risk of a broader regional conflict pushed Brent crude futures above $80 per barrel for the first time in over a month. As of Tuesday, Brent was up 0.09% at $81.00 per barrel, while U.S. crude gained 0.14% to reach $77.25 per barrel.
“Global markets are on edge as concerns grow that Israel might retaliate by targeting Iran’s oil infrastructure, following a recent missile attack,” noted analysts at ANZ in a report. They added, “Although a direct strike on Iran’s oil facilities is unlikely, the elevated tensions continue to support higher crude prices.”
Despite the geopolitical risks, Asian stock markets showed restrained movements on Tuesday. The MSCI Asia-Pacific index outside Japan fell 0.05%, while Tokyo’s Nikkei dropped 0.79%. Meanwhile, S&P 500 futures edged up 0.03%, and Nasdaq futures dipped slightly by 0.01%.
China’s markets are set to reopen after a week-long holiday, with expectations of increased activity and potential volatility. Chinese stock futures traded in Singapore have rallied 14% since the mainland’s markets closed on September 30, suggesting a strong start when trading resumes.
The Hang Seng China Enterprises Index in Hong Kong climbed 11% over the same period, indicating that mainland stocks could see significant gains as they catch up to global trends. Before the holiday, Chinese authorities rolled out their most aggressive economic stimulus measures since the pandemic, leading to a 25% jump in the CSI300 index over just five trading days.
Investors are eagerly awaiting a press conference by China’s National Development and Reform Commission for more details on the stimulus measures, which have fueled optimism in global markets.
“Foreign investors already positioned themselves ahead of China’s market reopening, driving a strong rally. The next phase of gains will likely depend on increased buying from mainland investors,” said Richard Tang, Head of Research at Julius Baer in Hong Kong.
Shifts in Fed Expectations
In the broader market, attention is still on the Federal Reserve’s potential rate cut trajectory after last Friday’s strong U.S. jobs data. The possibility of a 50-basis-point rate cut next month has now been ruled out, with some traders even considering a scenario where rates remain unchanged. Current market pricing suggests about 50 basis points worth of cuts by the end of December.
Reflecting these expectations, the two-year U.S. Treasury yield hovered near its highest level in over a month, last recorded at 3.9764%.
“Although the outlook for a rapid rate cut has weakened, the Fed’s easing cycle is not entirely off the table,” said Vishnu Varathan, head of macro research for Asia ex-Japan at Mizuho Bank. “The impressive U.S. jobs report warrants a reassessment of the market’s earlier expectations for aggressive rate cuts.”
Dollar Softens Amid Uncertainty
Despite shifts in rate expectations, the U.S. dollar didn’t find additional strength and remained subdued in early Asian trade. It fell 0.17% against the Japanese yen to 147.97, and the British pound edged up 0.03% to $1.3089. Against a basket of currencies, the dollar slipped 0.02% to 102.44, remaining close to its seven-week high reached last Friday.
In commodities, spot gold held steady at $2,643.33 an ounce as investors maintained their focus on the uncertain geopolitical backdrop and potential market shifts following China’s reopening.
Key Takeaway
Markets are treading carefully, with geopolitical risks and central bank policy playing a pivotal role. Investors will be closely monitoring China’s first trading session after the holiday break for signs of further market direction amid global uncertainty.
