Asian Stocks Stall as Oil Risk Grows: Is the Rally Over?
Asian stocks drifted sideways on Monday as investors weighed a renewed climb in oil prices against a global equity rally that hit fresh records just last week.
The lack of progress in ending the Iran war has kept crude elevated, raising the question of whether the recent bounce in Asian equity markets can hold.
A Rally Built on Rate-Cut Hopes
Japan’s Nikkei edged 0.4% higher in early morning trading Monday, but soon fell back to its Friday close. Meanwhile the MSCI Asia-Pacific index excluding Japan was flat and Australia’s resources-heavy shares slipped 0.3%. South Korea’s markets were closed for a public holiday.
The broader rally, which lifted the S&P 500 to a record high last week, has been driven by fading expectations that the Federal Reserve will hike rates next month, now priced at a 69% probability of holding steady after soft US retail sales and consumer sentiment data. S&P 500 futures added 0.1% Monday, and Nasdaq futures gained 0.2%.
Investors are now watching China’s July activity data and the August S&P Global PMI report this week for signs of whether the mid-year acceleration in US business activity, and the broader risk-on mood across Asia, can be sustained against a backdrop of rising energy costs.
Ten-year US Treasury yields slipped 1 basis point to 4.684%, while gold held at $4,381 an ounce.
Oil Climbs as Diplomacy Stalls
Peace talks and tanker traffic through the Strait of Hormuz remain frozen. Iran called on the United States on Saturday to accept defeat. Meanwhile President Donald Trump urged Americans to accept higher gasoline prices while the conflict continues.
At least 11 people were killed in Israeli strikes in southern Lebanon on Saturday. It was among the deadliest incidents since the country agreed to a US-mediated peace framework with Israel.
Brent crude held steady at around $89 a barrel after rising 6% last week. Meanwhile US crude slipped 0.3% to $82.12, having gained 5.4% over the same stretch. Shane Oliver, chief economist at AMP, said the current backdrop keeps the market on edge.
“While there is still no resolution to the Iran/Hormuz impasse, our base case remains that oil prices will stay in a $70-$100 range with Iran preventing it going lower and the U.S. moving to try and calm things down whenever it gets above $100.”
Oliver added that a lack of a durable peace deal, combined with Middle East oil flows still running 10% to 15% below normal levels, could push prices higher as reserves are drawn down.
Whether Monday’s calm holds may depend less on the Fed than on what happens next in the Gulf.
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