On Monday, Asian stocks fell as the risk of escalating conflict in the Middle East clouded confidence in a week packed with data on US GDP and inflation, as well as earnings from some of the world’s greatest technology companies.
Over the weekend, Washington warned of a significant risk to US interests in the area as ally Israel bombed Gaza and confrontations on its border with Lebanon escalated. Policy meetings are also held by the European Central Bank and the Bank of Canada, and while no rate hikes are expected, investors will be looking for clues on futures developments.
Bond rates have recently risen, tightening monetary conditions without the need for central banks to intervene, allowing the Federal Reserve to hint that it will likely remain on hold at its policy meeting next week. Indeed, futures suggest that the Fed has completed its tightening cycle and is toying with the possibility of rate reduction beginning in May of next year.
The increase in yields has put pressure on asset values and brought most major indices lower last week, while the VIX ‘fear index’ of US stock market volatility reached its highest level since March. Both the S&P 500 and Nasdaq futures were up 0.3% early Monday, while 10-year Treasury rates were up at 4.946% and heading back near 5.0%.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.1% to near a year’s low. The Nikkei in Japan fell 0.4%, as did the market in South Korea. With Microsoft, Alphabet, Amazon, and Meta Platforms all reporting profits this week, investors will be looking for some relief. IBM and Intel are also in the running. Profits should be bolstered by the strength of consumer demand, with US GDP numbers this week projected to show annualised growth of a whopping 4.2%, and nominal growth of up to 7%.
JPMorgan chief economist said in a statement that : “At the same time, the last quarter’s slight increase in hours worked indicates to a significant increase in productivity and a jump in corporate profits.” He also mentioned that as corporate and household income share the benefits of this nominal activity boom, the private sector’s underlying resilience in the United States is reinforced.
This outperformance by the United States has supported the dollar, albeit the fear of Japanese intervention has kept it around 150.00 yen for the time being. The dollar was recently trading at 149.85 yen, slightly shy of its recent high of 150.16. The euro was unchanged at $1.0588, while the Swiss franc held steady at 0.8927 per dollar, having gained from safe haven flows in recent weeks.
Gold has also drawn a safety bid, rising to $1,976 per ounce after reaching its highest level since May last week. Oil prices have been supported by the potential of supply interruptions from the Middle East, though Brent did hit resistance at $93.80 last week. Brent crude was down 43 cents at $91.73 a barrel at the time of writing, while US crude was down 39 cents at $87.69.
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