Asian markets experienced an upswing on Monday as traders assessed US inflation data, renewing optimism for an imminent interest rate reduction. However, gains were tempered by geopolitical concerns following recent joint US-UK strikes on Huthi targets in Yemen.
These airstrikes, targeting Iran-backed rebels, were a response to their threats of further attacks on Red Sea shipping, mirroring similar actions by Western forces on Friday. The developments triggered a four percent surge in oil prices on Friday, though gains were later trimmed as traders observed an uptick in non-OPEC production and indications of a slowing global economy. Both major oil contracts exhibited fluctuations on Monday.
Against the backdrop of these events, apprehensions have risen that the crisis, coupled with Israel’s ongoing conflict with Hamas in Gaza, might escalate into a regional conflict, potentially disrupting trade routes and propelling crude oil prices beyond $100.
Bloomberg reported that over 350 oil tanker owners had temporarily halted journeys through the Red Sea, with more likely to follow suit as Western forces caution ships to stay clear of the region.
Concerns have emerged that a broader conflict could push up energy prices, reigniting fears of inflation. This comes after a period of declining inflation last year, prompting central banks to contemplate interest rate cuts.
However, Friday’s data revealing a third consecutive monthly decline in the US producer price index, the best streak since 2020, injected optimism into expectations for a rate cut in the first quarter.
The producer price index figures provided a boost after a higher-than-expected rise in the consumer price index, along with robust job numbers and Federal Reserve minutes indicating a commitment to keeping rates elevated.
As a result, Treasury yields dropped, with traders factoring in an 80 percent likelihood that monetary policymakers would cut rates as early as March, compared to 62 percent the previous week. The market is anticipating approximately 170 basis points in reductions for 2024.
On Wall Street, the three main indexes closed slightly higher on Friday, with financials being a drag due to corporate reports warning of lower interest income this year as Fed borrowing costs decrease.
In the Asian markets, Tokyo continued its upward trajectory from last week, where the Nikkei surpassed 35,000 for the first time since 1990, buoyed by renewed inflation and a weaker yen that benefits exporters. Hong Kong and Shanghai also experienced gains, following China’s decision to refrain from cutting short-term interest rates while injecting billions of dollars into financial markets.
In Taipei, stocks rose as pro-sovereignty candidate Lai Ching-te won Taiwan’s presidential election. However, Lai’s Democratic Progressive Party (DPP) lost its legislative majority, signaling potential compromises with smaller parties, including the pro-China Kuomintang.
The modest winning margin for Lai and the legislative impasse suggest constraints on pursuing radical agendas, especially concerning Taiwan’s independence, according to Redmond Wong of Saxo Markets. He noted that while mainland China has expressed dissatisfaction, measured reactions may alleviate immediate concerns of heightened cross-strait tensions.
