Asian equity markets staged a broad rebound on Tuesday following Monday’s steep falls, as investors returned to risk assets following signs of de-escalation in tensions between Israel and Iran, according to a report by Reuters.
Government bond markets though, continued to reflect concerns over persistent inflation and the prospect of further interest-rate increases.
The recovery followed a volatile start to the week, with investors taking advantage of recent declines in technology and semiconductor shares. However, market strategists cautioned that the rally was concentrated in a limited number of sectors and regions, suggesting underlying sentiment remains fragile.
South Korea led gains across the region, with the benchmark index advancing 7% after suffering a sharp sell-off in the previous session. The rebound came after a period of strong performance had left valuations elevated and leveraged retail positioning stretched.
Japan’s Nikkei 225 climbed 2.1%, recovering part of Monday’s decline, while the MSCI Asia-Pacific index excluding Japan rose 3.0%.
Chinese equities also moved higher, supported by stronger-than-expected trade data. Exports increased 19% year-on-year in May, while imports rose 27%, both exceeding consensus forecasts. The figures highlighted the resilience of China’s external sector despite ongoing trade frictions with the United States, although concerns over domestic demand remain.
In contrast, European equity futures pointed to a softer open. Futures linked to the Euro Stoxx 50 and Germany’s DAX slipped 0.2%, while FTSE futures edged 0.1% lower.
US index futures were modestly firmer, with Nasdaq contracts outperforming amid renewed interest in technology shares. Investors are now focused on upcoming earnings from Oracle, which are expected to provide further insight into enterprise spending trends related to artificial intelligence.
Despite the improvement in risk sentiment, fixed-income markets remained under pressure. Strong US employment data released last week reinforced expectations that inflationary pressures may persist, prompting investors to reassess the likelihood of additional monetary tightening by the Federal Reserve.
Market pricing now suggests a growing probability of a US rate increase later this year, with investors closely watching Wednesday’s consumer price inflation report for further direction. Rising energy costs are expected to contribute to another firm inflation reading.
Short-dated Treasury yields remained near multi-year highs, reflecting expectations that US policy rates could stay elevated for longer. Similar dynamics are evident in Europe, where markets have fully priced in another quarter-point rate increase from the European Central Bank at this week’s meeting.
Strategists at Bank of America noted that inflation continues to exceed central bank targets across much of the global economy, contributing to higher bond yields and creating headwinds for longer-duration assets, private credit and several emerging-market currencies. The bank also highlighted signs that a number of equity markets are approaching overbought territory following recent gains.
Currency markets were relatively stable. The US dollar remained supported against the Japanese yen following the stronger-than-expected employment data, with traders monitoring levels that could potentially trigger intervention concerns among Japanese policymakers. The euro and sterling both recovered modestly after recent declines.
In commodities, oil prices retreated after an earlier surge, as concerns over immediate disruptions to Middle East supply eased. Brent crude slipped below recent highs after approaching the $98-per-barrel level overnight, while US crude also moved lower.
Gold traded little changed after touching its weakest level in two months during the previous session, as higher bond yields and a stronger dollar continued to weigh on demand for the precious metal.
While Tuesday’s equity rebound offered some relief following recent market volatility, investors remain caught between optimism over global growth and artificial intelligence-driven investment trends on one hand, and concerns over inflation, interest rates and geopolitical uncertainty on the other.
