Asian equities traded cautiously on Monday as lingering uncertainty over the Middle East ceasefire and growing expectations of further US interest rate hikes kept investors on the sidelines, while the dollar hovered close to a one-year high, Reuters reported.
Japan's Nikkei slipped 1% and South Korea's Kospi fell nearly 2%, pulling MSCI's broadest Asia-Pacific share index down 0.4%. Futures pointed to a firmer opening for Wall Street, with S&P 500 and Nasdaq futures rising 0.4%, while European futures gained 0.2%.
"It feels like we are lacking a bit of direction," Nick Twidale, chief market strategist at ATFX Global in Sydney, told Reuters. "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," he said.
Middle East Ceasefire Uncertainty Keeps Oil Supported
Investor sentiment remained fragile despite Iran and the United States agreeing to halt renewed hostilities after several days of tit-for-tat strikes that had threatened an interim peace deal. The renewed diplomatic effort follows attacks triggered after an Iranian projectile struck a cargo vessel in the Strait of Hormuz last week, with both sides accusing each other of violating the ceasefire.
Brent crude futures rose 0.85% to USD 72.60 a barrel, while US West Texas Intermediate crude gained more than 1% to USD 70.01 a barrel. "Markets enter July with a ceasefire that nobody quite trusts," Marc Chandler, chief market strategist at Bannockburn Capital Markets, told Reuters.
AI Stocks Remain Under Pressure
Investors also continued to reassess valuations of artificial intelligence-related stocks after a sharp rally over the past few years. While Micron Technology's upbeat earnings forecast provided some support, Apple's recent price hikes highlighted the rising costs linked to the AI investment cycle.
Strategists at BofA Global Research said investors were rotating away from mega-cap AI stocks towards smaller and more cyclical sectors, signalling an early broadening of market leadership. The Bank for International Settlements also cautioned that supply bottlenecks and intense competition could lead to overinvestment similar to previous technology boom-and-bust cycles.
"For this reason, traders have gravitated toward the defensive and cyclically oriented areas of the equity space in recent weeks," Jose Torres, senior economist at Interactive Brokers, told Reuters.
Dollar Stays Firm on Rate-Hike Bets
Expectations of further US interest rate hikes continued to underpin the dollar even as easing crude prices offered some relief on inflation. Markets are now pricing in at least one Federal Reserve rate hike this year, reversing earlier expectations of two rate cuts before the Middle East conflict escalated. BofA strategists expect three rate hikes, citing a resilient labour market, new Fed Chair Kevin Warsh and persistent inflation.
The dollar index stood at 101.33, just below the one-year high touched last week. The Japanese yen traded at 161.77 per dollar, remaining close to its weakest level in four decades as investors watched for possible intervention by Japanese authorities.
Gold Slides as Dollar Weighs
Gold slipped 0.4% to USD 4,072 an ounce as the stronger dollar weighed on bullion. The metal is on track for a 13% decline in the second quarter, its biggest quarterly fall since 2013, Reuters reported.
| Asset | Latest Move | Level |
|---|---|---|
| MSCI Asia-Pacific Index | -0.4% | – |
| Japan Nikkei | -1% | – |
| South Korea Kospi | ~-2% | – |
| Brent Crude | +0.85% | USD 72.60/barrel |
| WTI Crude | +1% | USD 70.01/barrel |
| Dollar Index | Firm | 101.33 |
| USD/JPY | Weak yen | 161.77 |
| Gold | -0.4% | USD 4,072/oz |
The cautious tone is expected to persist as investors await clarity on both geopolitical developments and the Fed's policy path. The next major data point will be the US jobs report, which could influence rate expectations.
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