Asian stocks struggle as US-Iran diplomatic progress eases market anxiety

Asian stock markets traded cautiously on Monday as investors assessed renewed diplomatic efforts between the United States and Iran after both countries agreed to halt their latest military confrontation

HONG KONG: Asian stock markets traded cautiously on Monday as investors assessed renewed diplomatic efforts between the United States and Iran after both countries agreed to halt their latest military confrontation, reducing immediate fears of a wider conflict in the Middle East. While the easing of tensions offered some relief to global financial markets, uncertainty surrounding the durability of the ceasefire kept investors on edge.

The agreement follows several days of escalating military exchanges that began after an Iranian missile reportedly struck a commercial cargo vessel passing through the strategic Strait of Hormuz. The incident triggered retaliatory strikes from both sides, with Washington and Tehran accusing each other of violating an interim ceasefire reached earlier this month.

The announcement that both countries would suspend hostilities and resume diplomatic talks in Qatar has improved market sentiment, although analysts say investors remain cautious given the fragile nature of the peace process.

US stock futures reflected the improved mood, with futures linked to the S&P 500 and Nasdaq each gaining around 0.5%, while European stock futures edged 0.13% higher, indicating a stable start to trading in Western markets.

However, Asian equities failed to mirror that optimism. South Korea’s KOSPI index fell nearly 2%, while Japan’s Nikkei 225 declined around 1%. The broader MSCI Asia-Pacific index excluding Japan also slipped approximately 0.3%, highlighting lingering investor caution across regional markets.

Market strategists said investors are waiting for stronger signals before making aggressive moves.

Nick Twidale, Chief Market Strategist at ATFX Global, said trading activity remains largely driven by short-term market flows rather than strong economic catalysts. He noted that additional encouraging developments from the Middle East could improve investor confidence later in the day, but for now markets appear to be lacking clear direction.

Oil prices steady despite easing geopolitical tensions

Oil prices remained relatively firm despite signs that geopolitical risks may be easing. Traders continue to monitor developments in the Gulf region, where any disruption to shipping through the Strait of Hormuz could significantly affect global energy supplies.

Brent crude futures were trading about 0.5% higher at $72.37 per barrel after trimming earlier gains, while US West Texas Intermediate crude climbed nearly 1% to $69.92 per barrel.

Although crude prices have retreated sharply from their recent conflict-driven highs, concerns over the stability of the region continue to provide underlying support.

The interim 14-point peace framework, agreed on June 17, was designed to halt military operations, restore commercial shipping through the vital Strait of Hormuz, and create space for negotiations on broader issues, including Iran’s nuclear programme.

Vasu Menon, Managing Director of Investment Strategy at OCBC, said financial markets have become increasingly accustomed to fluctuations in US-Iran relations. He added that despite periodic geopolitical shocks, the broader investment outlook for the second half of the year remains constructive, supported by strong liquidity conditions and generally healthy corporate earnings.

Technology sector faces valuation concerns

Apart from geopolitical developments, investors continue to reassess the outlook for technology companies, particularly firms benefiting from the artificial intelligence boom.

Analysts believe that valuations across many AI-related companies have become increasingly expensive following several years of rapid gains. While Micron recently issued a strong earnings forecast, Apple’s decision to increase prices on some products has highlighted the differing challenges facing major technology firms.

Strategists at Bank of America Global Research said investors are increasingly rotating capital away from mega-cap AI stocks toward smaller companies and more economically sensitive sectors. The shift suggests markets may be entering a broader phase of equity participation after months of heavy concentration in a handful of technology giants.

Meanwhile, the Bank for International Settlements warned that the current wave of AI investment may eventually face similar challenges seen during previous technology booms, including supply constraints, rising competition and excessive capital spending that may not generate expected returns.

Jose Torres, Senior Economist at Interactive Brokers, noted that the enormous financial demands associated with AI infrastructure are forcing many companies to preserve cash while carefully evaluating future investments.

According to Torres, these concerns have encouraged investors to favour defensive sectors and cyclical industries in recent weeks instead of high-growth technology stocks.

Expectations of higher US interest rates strengthen dollar

While lower oil prices could eventually help moderate inflation, economists believe current energy costs remain elevated enough to keep pressure on the US Federal Reserve to maintain a restrictive monetary policy.

Financial markets are now pricing in at least one US interest rate increase before the end of the year, marking a sharp turnaround from earlier expectations that the central bank would deliver two rate cuts.

Analysts at Bank of America hold an even more hawkish outlook, forecasting as many as three additional rate hikes. They cite resilient labour market conditions, persistent inflation and expectations surrounding the leadership of new Federal Reserve Chair Kevin Warsh as reasons for their forecast.

The shift in interest rate expectations has continued to support the US dollar.

The US Dollar Index remained at 101.33 on Monday, hovering just below the one-year high reached last week.

The Japanese yen remained under pressure, trading at 161.77 per US dollar. Although speculation persists that Japanese authorities could intervene to support the currency, traders remain cautious as the yen hovers near its weakest level in approximately four decades.

Gold extends losses

A stronger US dollar and expectations of higher interest rates continued to weigh on precious metals.

Spot gold declined 0.87% to $4,052.96 per ounce, extending recent losses. The precious metal is now on track to register a decline of roughly 13% during the second quarter, marking its steepest quarterly fall since 2013.