Most Asian share markets experienced a downturn on Monday amidst growing skepticism regarding the Middle East peace process. This uncertainty has led to a rise in oil prices and bond yields, resulting in investors recalibrating their expectations about potential increases in U.S. interest rates.
In the UK, the pound weakened against the dollar following reports that Labour Party leader Keir Starmer might be contemplating his political future. This speculation was fueled by the recent electoral success of rival Andy Burnham, prompting calls from several ministers within the Labour Party for Starmer’s resignation. Amid this political turbulence, former U.S. President Donald Trump suggested that Starmer was poised to step down, while also voicing threats of renewed military action against Iran. This comes even as Vice President JD Vance engaged in initial discussions with Iranian officials under an interim peace agreement.
The geopolitical tensions escalated with Iran’s announcement of a renewed closure of the Strait of Hormuz. Tracking services indicated a decline in maritime traffic through the strait, with only 26 ships making the passage over the weekend compared to 32 on Friday. In response to these developments, Brent crude futures increased by 1.1%, reaching $81.43 a barrel, although this is still a significant drop from a peak of $126.41 in May. U.S. crude also saw an uptick, rising 2.7% to $78.70 a barrel.
In terms of market performance, S&P 500 futures slipped by 0.5%, and Nasdaq futures fell 0.7%. European markets showed similar trends, with EUROSTOXX 50 futures declining by 0.5%, DAX futures down by 0.3%, and FTSE futures dipping by 0.1%. Contrarily, Japan’s Nikkei gained 0.7%, continuing an upward trajectory that brought it to all-time highs the previous week. However, South Korea’s market experienced a 0.9% drop after an impressive surge of over 11% in the preceding week, particularly in semiconductor stocks.
The MSCI index, reflecting Asia-Pacific shares excluding Japan, eased by 0.4%. On the bond market front, Treasuries faced increased pressure following a hawkish shift from the Federal Reserve, which has led to a 75% likelihood of a rate hike being priced in as early as September. Futures suggest an approximate 38 basis points tightening by year-end, and yields on 2-year notes rose by 4 basis points, reaching levels not seen since early 2025.
JPMorgan’s head of cross-asset strategy, Fabio Bassi, expressed a cautious outlook, indicating that while the baseline forecast anticipates a first rate hike in the second half of 2027, the risk of earlier hikes remains significant due to limited tolerance for inflation. He noted that positive labor market trends are likely to sustain higher interest rates, favoring sectors such as Quality Growth, Large Cap, and Tech, with an S&P target potentially extending towards 8,000.
The core inflation measure favored by the Fed is set to be revealed soon, with expectations of an increase to 3.4% in May, which may further indicate the need for tighter policy. The upcoming week will also feature remarks from key Fed officials, including Governor Christopher Waller.
In the currency market, the dollar remained resilient at 161.44 yen, with only the prospect of Japanese intervention preventing a test of higher resistance levels. The euro slipped to $1.1462 after recently hitting a three-month low, while the pound was down 0.2% to $1.3210 amid ongoing political uncertainties in the UK.
In commodities, rising bond yields put pressure on gold, which diminished by 0.1% to $4,154 an ounce, reflecting broader trends in non-interest-paying assets.
