Asian stock markets largely trended higher on Tuesday, fueled by investor optimism stemming from a strong Wall Street rally and expectations for better-than-anticipated corporate earnings. Meanwhile, the U.S. dollar hovered near a two-month high, bolstered by growing speculation that the Federal Reserve may implement a smaller interest rate cut next month.
The stock rally was tempered by a notable decline in oil prices following news that Israeli Prime Minister Benjamin Netanyahu reassured the United States of Israel’s focus on military rather than nuclear or oil targets in potential strikes against Iran. This announcement alleviated immediate concerns over oil supply disruptions from the Middle East, leading to a 3% drop in global oil prices.
Japan’s Nikkei index surged by 1%, reaching a three-week high after being closed on Monday for a holiday. The gains were largely driven by positive momentum from Wall Street, which closed on a high note due to robust performances in U.S. chip stocks and upbeat corporate earnings reports.
Elsewhere, the MSCI’s broadest index of Asia-Pacific shares outside Japan edged up by 0.2%. This rise was supported by gains in the Taiwanese and Australian markets but offset by declines in Chinese equities.
In China, the blue-chip CSI 300 index fell by 0.4%, and Hong Kong’s Hang Seng index slipped by 0.3%. Investors in these regions were left waiting for more concrete stimulus measures from Beijing, dampening enthusiasm. Reports suggest that the Chinese government may raise an additional 6 trillion yuan ($850 billion) through Treasury bonds over the next three years to bolster the country’s flagging economy. However, the lack of immediate details has left investors cautious.
“China’s signal on policy stimulus prompted us to go modestly overweight, especially given depressed valuations. Details have been scant, so we could change our view if future announcements disappoint.”
At the same time, the institute expressed optimism about U.S. stocks, particularly the technology sector, as corporate earnings growth is expanding beyond just tech firms. However, they cautioned that concerns over stretched valuations could lead to occasional selloffs. For this reason, they recommended considering global exposure in markets where valuations remain low and catalysts for growth are present.
Overnight, Wall Street had a stellar performance, with the S&P 500 and Dow Jones Industrial Average soaring to record highs. The rally was driven in part by the continued strength of chipmakers, particularly Nvidia, which saw a 2.4% surge. Investors are increasingly optimistic about the AI sector, which has continued to outperform expectations. Nvidia, often regarded as a bellwether for AI-driven growth, has benefitted from this enthusiasm.
The upbeat sentiment was also fueled by better-than-expected earnings from major financial institutions such as JPMorgan Chase and Wells Fargo, which provided a strong start to the third-quarter earnings season. Investors are now eagerly awaiting quarterly earnings reports from other major banks, including Citigroup, Bank of America, and Goldman Sachs, due later on Tuesday. The financial sector is expected to play a key role in determining the market’s direction for the remainder of the year.
In currency markets, the U.S. dollar eased slightly, slipping 0.2% to 149.50 yen, retreating from a 2-1/2-month high of 149.98 reached overnight. Despite the dip, the dollar remains strong on the back of investor sentiment that the Federal Reserve will opt for a smaller interest rate cut of 25 basis points next month rather than a more aggressive 50-basis-point reduction. This optimism is driven by the belief that the U.S. economy is growing at a steady pace without showing signs of overheating.
Fed officials have contributed to this sentiment by signaling a cautious approach to future rate cuts. On Monday, Fed Governor Christopher Waller emphasized the need for “more caution” when considering interest rate adjustments, while Minneapolis Fed President Neel Kashkari suggested that future rate cuts would likely be modest.
According to CME’s FedWatch tool, traders currently see an 88% chance that the Fed will cut rates by 25 basis points in its upcoming meeting, with a 12% probability that rates will remain unchanged. This outlook has provided continued support for the dollar, which remains near its highest level in two months against major currencies.
U.S. bond markets were closed on Monday due to a holiday, but the early trading in Asian markets saw a slight dip in cash Treasury prices. Yields on two-year U.S. Treasuries rose by 1 basis point to 3.9533%, while 10-year yields climbed 2 basis points to 4.0885%. The upward movement in yields reflects the market’s expectations that the Federal Reserve will proceed with caution in its rate-cutting plans, avoiding any aggressive actions that might destabilize the economic recovery.
In the commodities market, oil prices continued their slide for the third consecutive session. Brent crude futures fell by 2.9% to $75.22 per barrel, extending the 2% drop seen in overnight trading. The recent decline was triggered by reports that Israeli Prime Minister Netanyahu had informed the U.S. that Israel’s potential strikes against Iran would focus solely on military targets, rather than Iran’s nuclear or oil infrastructure. This assurance helped ease market fears of a sudden disruption in global oil supplies, particularly from the Persian Gulf region, which accounts for a significant portion of the world’s energy production.
The broader decline in oil prices can also be attributed to concerns over weakening demand, particularly in major economies such as China, where industrial output has slowed in recent months. As a result, the market has become more focused on demand-side risks, further driving down prices.
Gold prices also saw a minor dip, reflecting the shift in investor interest toward equities and away from traditional safe-haven assets. The precious metal was down 0.1%, trading at $2,648.57 per ounce in early Tuesday trading. The decline comes as investors feel more confident about the outlook for corporate earnings and global economic stability, reducing the demand for gold as a hedge against uncertainty.
As investors digest Tuesday’s developments, attention will turn to a series of upcoming events that could further influence market sentiment. In particular, the European Central Bank (ECB) is set to announce its latest monetary policy decision on Thursday. Market participants are closely watching whether the ECB will signal additional measures to combat inflation, particularly in the wake of weaker-than-expected economic data from the eurozone.
The upcoming earnings reports from major U.S. banks will also play a pivotal role in shaping market direction. Investors are eager to see whether the strong start to the third-quarter earnings season can be sustained, particularly in sectors beyond technology and finance.
Finally, geopolitical developments in the Middle East will remain in focus, especially if tensions between Israel and Iran escalate further. While Netanyahu’s comments have reassured markets for now, any sudden shift in the geopolitical landscape could trigger renewed volatility in both oil prices and broader financial markets.
