Asian share markets rallied on Monday as oil prices dropped 5% following a pause in Gulf fighting, providing relief from inflation fears and boosting bonds ahead of a packed week of central bank meetings and earnings reports. Japan's Nikkei edged up 0.2% while South Korea's chip-heavy index firmed 0.2%, with MSCI's broadest index of Asia-Pacific shares outside Japan rising 0.5%. The rally came as Brent crude slid 4.7% to $92.27 a barrel and U.S. crude dropped 5.0% to $84.89, with the lull in fighting over the Strait of Hormuz easing supply disruption concerns. As per Reuters, the pullback in oil provided some relief from inflation fears and led markets to slightly pare the probability of rate hikes from the Federal Reserve.
Oil prices fell more than 5% after Iran said on Sunday it would halt its own attacks as long as the United States did the same, with the U.S. military reportedly concerned about dwindling supplies of ammunition. Brent crude slid 4.7% to $92.27 a barrel and U.S. crude dropped 5.0% to $84.89, providing significant relief for oil-dependent economies. Japan remains heavily dependent on Middle Eastern oil imports, making its economy particularly sensitive to supply disruptions and swings in crude prices. Sally Auld, group chief economist at NAB, noted that developments in the Middle East have moved in a positive direction over the weekend, adding credibility to the notion that oil above $100 a barrel seems to induce de-escalatory behaviour from both sides.
Notable gains were seen from Mitsubishi UFJ (1.2%), SUMCO Corp (3.8%), Nintendo (6.6%), Toyota Motor (2.4%) and Fast Retailing (1.5%) on Monday's session. The rise was led by Shiseido (8.24%), Bandai Namco Holdings (7.64%) and Konami (6.44%). However, technology stocks mostly declined following a tech selloff on Wall Street on Friday amid mounting concerns over massive AI spending. On the downside, the weakest performers were Shin-etsu Chemical (-8.06%), Chugai Pharma (-7.17%) and Fujikura (-5.81%). According to Reuters, the recovery came after the benchmark had dropped 1839 points or 2.77% on Friday to close at 64584 points, with losses led by Softbank (-7.57%), Mitsubishi Motors (-7.31%) and Renesas Electron (-7.24%).
On the domestic front, investor sentiment remained cautious as Prime Minister Sanae Takaichi's approval ratings slipped, adding to concerns about the domestic economic outlook. The government's efforts to reduce the impact of inflation have yet to meet household expectations, with markets closely watching for policy responses to address these growing concerns. This domestic uncertainty comes alongside the positive impact from easing geopolitical tensions, creating a mixed sentiment environment for Japanese markets.
The pullback in oil helped 10-year Treasury yields fall 4 basis points to 4.63%, and nudged the dollar broadly lower with the euro adding 0.3% to $1.1408 and the dollar dipping 0.2% on the yen to 163.54. The Bank of England holds its meeting on Thursday and the Bank of Japan on Friday, with both expected to hold steady while remaining cautious about inflation risks ahead. Markets imply around a one-in-three chance of a rate rise from the Federal Reserve, though most analysts doubt Chair Kevin Warsh would be in favour of a move. Investors remain cautious ahead of major earnings reports from U.S. cloud companies this week, with about one-third of S&P 500 companies due to report and earnings on track to boast a 26.5% increase on last year, according to LSEG IBES data.
