Stock markets throughout Asia displayed caution Thursday after reports emerged of another U.S. military action in Iran, dampening investor hopes for an immediate resolution to regional tensions. Meanwhile, anticipated U.S. inflation figures posed additional concerns for bond markets and interest rate policies.
Energy prices surged 2% while Treasury bond yields climbed higher as the military action sent mixed messages about ongoing negotiations. This came after President Donald Trump rejected an Iranian announcement regarding a potential agreement to reopen shipping lanes through the Strait of Hormuz.
“Over the next 2 weeks, we expect either a deal for a new ceasefire, or the current ceasefire will have collapsed with active hostilities resuming,” said Madison Cartwright, a senior geo-economics analyst at CBA.
Cartwright estimated a 70% likelihood that negotiators would reach an agreement, though he warned that the shipping corridor’s future remained uncertain.
“Insurance through the strait has become prohibitively expensive and it’s unclear how and at what price insurance will be made available,” he added. “It is also not clear if Iran will charge a toll, or a toll by another name.”
Given that shipping traffic through the waterway remains severely limited, Brent crude prices climbed 2.3% to reach $96.50 per barrel, while U.S. crude increased 2.2% to $90.59.
Ten-year Treasury note yields rose 2 basis points to 4.502% as concerns about sustained high oil prices maintained upward pressure on inflation forecasts.
The uncertainty also slowed the technology sector’s recent market gains, with Japan’s Nikkei declining 0.2% and South Korean markets remaining unchanged. MSCI’s comprehensive Asia-Pacific stock index excluding Japan fell 0.1%.
Japanese media indicated the government intends to issue “bridging bonds” to finance major programs designed to stimulate investment in economic growth and security initiatives.
European market futures showed weakness, with EUROSTOXX 50 and DAX futures both dropping 0.2%, while FTSE futures declined 0.3%. S&P 500 and Nasdaq futures gained 0.1%.
Market attention now turns to upcoming U.S. personal consumption expenditure data, which contains the Federal Reserve’s preferred inflation measurements.
Energy price impacts are projected to push headline PCE to a three-year peak of 3.8%, while core inflation is expected to increase 0.3% to an annual rate of 3.3%, significantly exceeding the Fed’s 2% objective.
The inflation acceleration has prompted additional Fed officials to advocate for abandoning the central bank’s accommodative stance or even considering rate increases.
“With inflation well above target but the growth impact of the conflict still uncertain, the Fed faces genuine two-sided risk,” argued analysts at NAB in a note.
“We see that uncertainty as the argument for holding rates through end-2027, whereas a firming in services core inflation would sharpen the case for higher-for-longer and a sharp moderation would shift attention to the emerging growth headwinds.”
Financial markets suggest equal odds for a quarter-point federal funds rate increase to 3.75-4.0% by year’s end.
Evolving Fed policy expectations have strengthened the U.S. dollar, which traded at 99.291 against major currencies, remaining stable for the week.
The dollar reached a four-week high against the yen at 159.57, approaching the 160.00 level that has previously prompted Japanese currency market intervention.
The euro declined slightly to $1.1620, though it maintains support from expectations that the European Central Bank will raise rates at its June meeting.
During Thursday remarks, ECB Chief Economist Philip Lane stressed the critical need to prevent energy price spikes from creating higher inflation expectations.
In commodities trading, gold dropped 0.3% to $4,445 per ounce, continuing to provide limited appeal as either a safe-haven investment or inflation protection.
