Asia Markets Edge Higher as Gulf Tensions and Fed Rate Bets Collide

Asian equity markets tracked Wall Street's record highs on Monday, buoyed by a softer-than-expected US jobs report that reduced the likelihood of a near-term Federal Reserve rate hike. However, lingering uncertainty over the reopening of the Strait of Hormuz kept oil prices elevated, adding a layer of complexity for regional policymakers and investors alike.

Iran announced on Sunday that a deal with Oman to define new shipping lanes in the Strait of Hormuz was in its final stages, but reiterated that the waterway would only fully reopen once the United States met other conditions. This has left the vital chokepoint for global oil shipments operating at a trickle, pushing Brent crude up 0.9% to US$84.32 a barrel and US crude up 0.7% to US$78.74 a barrel.

What Does the US Jobs Data Mean for Fed Policy?

The US July nonfarm payrolls report came in below expectations, paring the risk of a rate hike at the Federal Reserve's September meeting. Futures markets now price in a 44% probability of a move, down sharply from 67% a week ago. The pullback in rate expectations helped US Treasuries rally on Friday and propelled Wall Street to fresh record highs.

Michael Feroli, chief US economist at JPMorgan, noted: “Our forecast for core CPI of 0.22% is probably not quite firm enough to prompt a hike from the Fed at the September meeting, though repeated prints closer to 0.3% could do it. One thing we are watching for is any rebound in core goods prices after a two-month stretch in which they fell.” The US July consumer price report, due Wednesday, will be the next key data point. Analysts expect a 0.1% rise in headline CPI and 0.2% for core.

How Are Asian Markets Reacting?

Japan's Nikkei rose 0.6% on Monday, South Korea added 0.5%, and MSCI's broadest index of Asia-Pacific shares outside Japan edged up 0.3%. For Europe, EURO STOXX 50 futures and DAX futures both dipped 0.1%, while FTSE futures fell 0.4%. S&P 500 futures slipped 0.1%, and Nasdaq futures were little changed after climbing 5% last week on strong earnings.

Analysts at Bank of America highlighted that with nearly 90% of S&P 500 results in, earnings per share were up 30% year-on-year after excluding investment gains at Alphabet and Amazon. A 76% EPS beat rate matched the strongest level since 2021. “AI remains the stand out, with median EPS growth of 28% versus 12% for non-AI related stocks, though consensus expects AI to slow to 16% next quarter,” they said in a note.

What About Bond Yields and the US Dollar?

Yields on 10-year Treasuries edged up to 4.673% as the market braces for US$125 billion in new issuance this week. The drop in yields and improved risk appetite pulled the US dollar broadly lower, with the euro just off a seven-week top at US$1.1557. The dollar was flat on the yen at 157.85, with investors wary of potential intervention should the yen weaken further.

Commodities: Gold and Oil in Focus

In commodity markets, the drop in yields helped non-interest-paying gold hold at US$4,342 an ounce, having climbed more than 7% last week. Meanwhile, oil prices remain sensitive to developments in the Gulf, with any breakthrough in negotiations likely to ease supply concerns and weigh on crude.

FAQ: Key Questions for Southeast Asian Investors

How does the Strait of Hormuz situation affect Southeast Asia?

Southeast Asia, as a net importer of oil, is directly exposed to disruptions in the Strait of Hormuz. Higher oil prices increase import costs and fuel inflation, putting pressure on central banks in the region to adjust monetary policy. Singapore, Thailand, and Indonesia are particularly sensitive to energy price swings.

Could the Fed still hike in September?

Yes, but the probability has dropped to 44% after the soft jobs report. The July CPI data on Wednesday will be critical. If core inflation prints above 0.3%, the market could quickly reprice a September move. For now, the data-dependent Fed remains in wait-and-see mode.

What does this mean for ASEAN currencies?

A weaker US dollar broadly supports ASEAN currencies, but the outlook is mixed. If oil prices stay elevated, import-heavy economies like the Philippines and Thailand could see their currencies come under pressure. A dovish Fed would provide relief, but regional central banks must balance growth and inflation risks.