Market Context

Asian stock markets entered the new quarter in a cautious mood as talks between the United States and Iran continued to face obstacles. At the same time, investors closely monitored the possibility of Japanese currency intervention as the yen fell to its lowest level in 40 years against the U.S. dollar.

Market sentiment was also pressured by a sharp rise in U.S. Treasury yields, after investors increased their expectations that the Federal Reserve could continue raising interest rates ahead of key U.S. labor-market data.

U.S.-Iran Talks Remain Stalled

Iran said it would not meet with senior U.S. envoys, even though the U.S. had sent representatives to the region. The two sides remain far apart on a framework that would fully reopen activity through the Strait of Hormuz.

This development means geopolitical risks in the Middle East have not fully eased and continue to affect investor sentiment across financial markets.

The Fed Remains the Market’s Main Focus

U.S. Treasury yields rose sharply in the previous session, prompting markets to continue pricing in the possibility of further Fed rate hikes. Futures currently imply around a 33% chance that the Fed could raise rates at its meeting later this month, while the probability of a September hike is priced between 67% and 88%.

All eyes are now on Fed Chair Kevin Warsh’s remarks at a European Central Bank conference, as investors look for signals on the future direction of monetary policy.

Asian Equities Trade Mixed

In Japan, the Nikkei rose another 0.8%, after surging 37% in the previous quarter. Technology stocks continued to support market sentiment, while manufacturing activity recorded its strongest quarter since 2014 as new orders increased sharply.

In contrast, South Korea’s main index slipped 0.9%, after jumping 68% in the second quarter on strong demand for AI-related semiconductor stocks. South Korea’s exports in June also grew at the fastest pace in nearly 50 years, driven by a nearly 200% surge in semiconductor shipments.

MSCI’s broadest index of Asia-Pacific shares outside Japan edged up 0.2%, while Chinese blue-chip stocks gained 0.3%.

Wall Street Depends Heavily on Earnings Season

After Wall Street recorded its strongest quarter since 2020, markets are now entering a period of waiting for corporate earnings results. Semiconductors were the key driver, with the Philadelphia Semiconductor Index rising as much as 88% during the quarter.

The upcoming earnings season will be critical in confirming whether profit expectations can continue to improve, especially in the technology and AI sectors.

According to Goldman Sachs, consensus expectations point to 22% year-on-year growth in S&P 500 earnings per share. AI infrastructure stocks are expected to contribute nearly 60% of S&P 500 EPS growth, with Micron and Nvidia together accounting for more than 40%.

The Dollar Hits a New High Against the Yen

The 10-year U.S. Treasury yield rose to 4.55%, supporting the U.S. dollar as it climbed to a fresh 40-year high against the yen at around 162.84 yen per dollar.

This move has increased speculation that Japan may intervene to support its currency. However, analysts believe the latest move has been driven more by broad U.S. dollar strength than by yen weakness alone.

In addition, the sharp decline in oil prices has benefited Japan, as the country is a net energy importer.

The Euro Holds Steady, While Oil Remains Far Below Its May Peak

The euro was nearly flat around $1.1409, slightly above its recent 13-month low of $1.1325.

European Union inflation data is expected to show a decline to 3.0% in May, down from 3.2% in the previous month. Markets are no longer strongly pricing in a July rate hike from the European Central Bank, with the probability standing at only around 32%.

In energy markets, Brent crude rose slightly by 0.3% to $73.19 per barrel, still far below its May peak of $126.41 per barrel. U.S. crude added 0.4% to $69.74 per barrel.

Gold Remains Under Pressure

Gold has yet to regain its appeal after a difficult quarter. The metal fell 0.7% to around $3,977 per ounce.

The main pressure came from rising U.S. Treasury yields, a stronger U.S. dollar, and expectations that the Federal Reserve may continue to maintain a tighter monetary policy stance.

Conclusion

Global financial markets are entering the new quarter with a cautious tone. U.S.-Iran risks, the possibility of further Fed rate hikes, a stronger dollar, and elevated bond yields are putting pressure on multiple asset classes.

In the short term, investors will focus on three key factors: Fed Chair Kevin Warsh’s remarks, U.S. labor-market data, and the upcoming earnings season for major technology companies.

If corporate earnings remain strong, equity markets may continue to hold their momentum. However, if yields continue to rise and the Fed sends a more hawkish signal, correction pressure could return.

Source: Reuters