Asian Stocks Advance on Soft US CPI Data Despite Middle East Oil Risks
Asian markets rallied and the dollar weakened after softer-than-expected US inflation data reduced immediate rate hike fears, though escalating Middle East tensions continue to threaten the global inflation outlook through surging energy prices.
Asian equities surged and US Treasury yields steadied after softer-than-expected US consumer price index data prompted traders to unwind bets on an imminent Federal Reserve rate hike. The MSCI Asia Pacific equities gauge climbed 1.2 percent, with advancing stocks outnumbering decliners by more than three to one.
South Korea’s Kospi index jumped more than 6 percent, driven by a 10 percent gain in SK Hynix Inc following a 27 percent surge in its American depositary receipts. Markets in Japan and Australia also posted gains, putting the regional benchmark on track for a second consecutive day of advances.
The relief over inflation comes with caveats. Federal Reserve Chairman Kevin Warsh testified before US lawmakers that while the June inflation reading was better than expected, the central bank has no tolerance for high prices and still has a long way to go. "I’m not going to show up here and say mission accomplished," Warsh stated, adding that "there’s plenty of work to do."
Market participants view the data as a near-term reprieve. Tiffany Wilding at Pacific Investment Management Co noted that the softer CPI is a "big relief." She added that while the data will not eliminate discussion of further tightening entirely, it "should effectively remove a July rate hike from consideration."
However, escalating geopolitical friction in the Middle East threatens to complicate the inflation trajectory. Oil prices rose for a third day after President Donald Trump threatened further strikes on Iran, shortly after the US resumed its blockade on the country's shipping through the Strait of Hormuz.
Global benchmark Brent crude advanced 1.8 percent to trade above $86 a barrel, following an 11 percent surge over the previous two sessions. Traders are closely monitoring refined products, as fuel markets in the US and Europe are showing record tightness that could inflict further pain on consumers facing high pump prices.
Supply constraints are further exacerbated by disruptions in Russia. The country is struggling to deliver its mandated overseas crude shipments amid escalating Ukrainian drone strikes targeting its domestic refineries.
Despite the energy risks, the combination of weak US inflation and a strong start to corporate earnings has revived the artificial intelligence trade. A rally in chipmakers helped lift the Nasdaq 100, and the S&P 500 rose after major banks reported solid results. Conversely, International Business Machines Corp sank 25 percent following a sales miss.
The shifting rate expectations have also reshaped currency and commodity markets. The US dollar weakened against all of its Group-of-10 peers, while gold maintained its recent gains to trade around $4,050 an ounce.
