Asian stocks are heading for their strongest weekly gains in two months as benign U.S. inflation data dampens expectations of an imminent Federal Reserve rate hike. Markets have largely shrugged off ongoing Middle East tensions and a surge in Brent crude futures, though currency pressures persist in Japan.
Asian equities climbed on Friday, putting regional markets on track for their best weekly performance since mid-June, according to reporting from Reuters. Softer U.S. inflation figures released during the week led traders to reprice monetary policy expectations, dialing back the urgency for a near-term Federal Reserve rate increase.
Inflation Data Alters Fed Rate Hike Expectations
U.S. consumer prices increased by 0.1% in July, matching market forecasts and easing immediate concerns over runaway pricing pressures. Money markets quickly reacted to the data, with the CME FedWatch tool indicating that traders are now pricing in a 35% chance of a central bank rate hike next month, down significantly from 55% a week earlier.
That shift in sentiment has provided a clear tailwind for risk assets across the Pacific. Charu Chanana, chief investment strategist at Saxo, noted that risk appetite has room to hold its ground now that immediate Federal Reserve pressures have receded. However, Chanana cautioned that underlying vulnerabilities remain.
Across the region, MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.16% on Friday, pointing toward a 2.6% weekly advance. Japan’s Nikkei rose 1.5%, while South Korea’s KOSPI index climbed 1.8%, putting it on course to snap a seven-week losing streak with an impressive weekly gain of nearly 11%.
Middle East Conflict Keeps Oil Elevated
Despite the broader stock market relief, geopolitical friction in the Middle East continues to cast a shadow over trading floors. Negotiations aimed at securing a permanent end to the Gulf conflict have stalled, leaving markets sensitive to any fresh supply disruptions.
Brent crude futures steadied at $87.03 per barrel following a Thursday dip, remaining on track for a 4% weekly gain that breaks a two-week losing streak. The upward pressure on oil follows renewed U.S. threats to increase economic pressure on Iran, including the potential expansion of a naval blockade. Meanwhile, Iran and the U.S. remained deadlocked over efforts to agree a permanent end to the war in the Gulf, with President Donald Trump asserting U.S. control over the Strait of Hormuz—a claim swiftly contested by Iran.
“Without clarity on the Middle East/Hormuz, another oil spike could quickly revive inflation and Fed concerns.”
Charu Chanana, chief investment strategist at Saxo
John Sidawi, senior portfolio manager for fixed income at Federated Hermes, highlighted a persistent disconnect between escalating geopolitical risks and relatively subdued asset price volatility.
“For now, markets appear willing to tolerate a significant amount of uncertainty without demanding higher risk premiums.”
John Sidawi, senior portfolio manager for fixed income at Federated Hermes
Yen Weakness and Bank of Japan Pressure
In foreign exchange markets, the Japanese yen remained under intense pressure, trading at 159.36 per U.S. dollar. The currency hovered dangerously close to the psychological 160 threshold that previously triggered joint currency intervention by Tokyo and Washington.
Traders are increasingly betting that the Bank of Japan will be forced to act by raising interest rates as early as next month, moving ahead of previous expectations for a December move. Wholesale prices in Japan jumped 7.2% in July from a year earlier, underscoring widening domestic inflation pressures.
Padhraic Garvey, head of global rates and debt strategy at ING, argued that the yen’s ongoing struggles stem directly from monetary policy inertia.
Garvey added that while aggressive tightening might be viewed as a headwind for economic growth, authorities face a clear choice regarding whether to prioritize defending the currency.
Gold Profit-Taking and Global Fixed Income
Precious metals saw a pullback as investors locked in recent gains. Gold prices slipped 0.6% to $4,325 per ounce, retreating from multi-month highs reached in the previous session.
In fixed income, U.S. Treasury yields ticked upward, with the yield on benchmark debt climbing to 4.688%. Meanwhile, in Australia, Reserve Bank Assistant Governor Christopher Kent remarked during a Sydney event that recent cash rate increases are working to temper domestic spending, noting that monetary policy takes some time for tighter monetary policy to have its full effect on economic activity and inflation
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