GLOBAL MARKETS: Asia stocks adrift as Middle East worries meet rate-hike bets

SINGAPORE — Asian equities were mixed on Monday as markets reacted to a fragile easing of tensions between Iran and the United States, which agreed to halt renewed hostilities that had recently disrupted sentiment and supported oil prices. The U.S. dollar remained firm, hovering near a one-year high amid expectations of further interest rate increases.

The tentative return to diplomacy follows several days of escalating exchanges after an Iranian projectile struck a cargo vessel in the Strait of Hormuz last week. Both sides have since accused each other of violating an interim ceasefire agreement, keeping investors cautious about the durability of the truce.

In early trading, U.S. and European equity futures edged higher, suggesting a mild risk-on tone. However, Asian markets struggled for direction. South Korea’s benchmark index fell nearly 2%, while Japan’s Nikkei declined about 1%, dragging the broader Asia-Pacific index slightly lower.

Market analysts said sentiment remains fragile and highly reactive to geopolitical headlines. “It feels like we are lacking a bit of direction,” said Nick Twidale, chief market strategist at ATFX Global in Sydney. He added that markets could see short-lived boosts from positive developments, but overall trading is likely to remain driven by flows rather than strong conviction.

Oil prices rose as concerns persisted over the stability of the ceasefire and the security of key shipping routes. Brent crude gained around 0.85% to the low $70s per barrel, while U.S. West Texas Intermediate also climbed more than 1%, reflecting lingering risk premiums despite recent easing.

The interim 14-point peace framework agreed earlier this month was intended to halt fighting and reopen critical maritime routes while broader negotiations continue, including discussions on Iran’s nuclear program. However, analysts warn that confidence in the agreement remains limited. “Markets enter July with a ceasefire that nobody quite trusts,” said Marc Chandler, chief market strategist at Bannockburn Capital Markets.

Beyond geopolitics, investors continue to weigh concerns over stretched valuations in artificial intelligence-related stocks after a prolonged rally. Recent earnings updates from major technology firms have highlighted both strong demand and rising cost pressures, fueling debate over sustainability.

Some market strategists say capital is gradually rotating away from large-cap tech leaders toward smaller and more cyclical sectors, signaling an early broadening of market performance after years of concentration. Meanwhile, global financial authorities have warned that the rapid surge in AI investment could face setbacks if supply constraints and competition intensify.

Attention is also turning to interest rate expectations, as inflation risks remain elevated. While easing oil prices could help temper inflation pressures, markets are increasingly pricing in the possibility of additional U.S. Federal Reserve tightening. Investors now anticipate at least one rate hike this year, a sharp shift from earlier expectations of rate cuts.

The stronger rate outlook has kept the U.S. dollar elevated, with the dollar index holding just below its recent one-year peak. The Japanese yen remained under pressure, trading near multi-decade lows as speculation of possible intervention by Japanese authorities continued to limit further declines.

Safe-haven demand for gold weakened under the stronger dollar environment, with prices edging lower and on track for their largest quarterly decline in more than a decade.

Overall, markets remain caught between easing geopolitical tensions, shifting interest rate expectations, and ongoing concerns over technology valuations, leaving global investors with a cautious and uneven start to the new quarter. -Reporting by Ankur Banerjee in Singapore; Editing by Jacqueline Wong and Shri Navaratnam/Reuters