Asian stock markets experienced a decline on Monday, driven by the intensifying conflict in the Gulf, which has led to rising oil prices and heightened inflation concerns. Investors are also bracing for a significant week ahead, featuring key earnings reports from major technology companies that will further assess confidence in the artificial intelligence sector.
Brent crude oil prices surged past $90 per barrel for the first time in over a month as the U.S. military continued its operations against Iran for the ninth consecutive day, prompting retaliatory strikes from Iran throughout the region. The movement of vessels through the Strait of Hormuz was notably limited on Sunday, with reports of at least one ship on fire.
Shane Oliver, head of investment strategy at AMP, commented, “If the Strait remains closed and the conflict escalates, oil prices could potentially reach $150 per barrel in order to balance demand with the supply disruptions. This scenario is not our base case but poses a significant risk.” Brent crude ultimately climbed by 2.6% to settle at $90.40 per barrel, while U.S. crude increased by 2.3% to $84.39.
The surge in fuel prices has reignited inflation fears, even after last week’s U.S. consumer price data came in lower than expected. Futures markets are now anticipating rate hikes from the Federal Reserve, estimating an increase of 29 basis points by the end of the year.
Bruce Kasman, chief economist at JPMorgan, noted, “While we predict a gradual approach to a Fed rate hike in 2027, the current risks are leaning towards a sooner increase than previously expected.” Market futures suggest a 60% probability of a rate hike as early as September, leading to a rise in 30-year Treasury yields above the critical 5.0% mark. This shift tends to divert investment from equities to fixed income and raises expectations for future corporate earnings.
This transition occurs as investors reevaluate the inflated valuations of semiconductor and AI stocks, with the Philadelphia Semiconductor Index experiencing a 10% decline last week, leaving it down by 20% from its peak in June.
The market faced additional pressure on Friday when the Chinese AI company Moonshot announced its new open weight model, Kimi K3, claiming performance levels nearing those of U.S. competitor Anthropic’s frontier Fable model.
As a result, this week’s earnings announcements from companies such as Alphabet, Intel, and Tesla are particularly crucial. Analyst Savita Subramanian from Bank of America remains optimistic, projecting a 5% earnings beat compared to consensus estimates, translating to a 28% growth rate. The technology sector is expected to contribute significantly to this growth, with semiconductors anticipated to experience a remarkable 130% year-on-year increase.
These projections helped stabilize S&P 500 futures, while Nasdaq futures saw a slight increase of 0.1%. In European markets, EUROSTOXX 50 futures were relatively unchanged, and both DAX and FTSE futures fell by 0.1%. Japan’s Nikkei index was closed for a holiday after a 6.4% drop in the previous week due to a technology sector downturn. Meanwhile, the MSCI Asia-Pacific index, excluding Japan, dipped by 0.3%, although Chinese blue-chip stocks gained 1.4%.
South Korea’s chip-heavy market continued to struggle, dropping an additional 4.2% after a dramatic 9% decline the previous week as retail investors were forced out of leveraged positions.
The recent surge in oil prices poses challenges for the European Central Bank, which is scheduled to meet on Thursday and is expected to maintain interest rates at 2.25% following a hike in June. Market participants are closely watching for guidance from policymakers, as there is a strong expectation for a rate increase at the September meeting and a rise to 2.75% early next year.
The euro remained steady at $1.1433, having fluctuated between $1.1377 and $1.1482 for over a week. The dollar held firm at 162.39 yen, just shy of a 40-year peak of 162.84, with Japanese officials indicating potential intervention if the yen depreciates rapidly. The British pound stabilized at $1.3449 as bond markets awaited the announcement of a new treasurer by the United Kingdom’s incoming Prime Minister, Andy Burnham.
In commodities, the increase in yields placed downward pressure on gold, which fell by 0.5% to $3,998 per ounce.
