Asian shares drift as oil gains keep inflation risks elevated

Asian stock markets maintained a stable pattern on Monday as investors remained cautious about oil prices, which had risen significantly the previous week amid ongoing tensions in the Middle East. The risk of stalled peace efforts in the region continued to loom, potentially driving oil volumes down by 10%-15% below typical levels, thereby pushing prices upward as reserves dwindled.

The lack of progress in peace talks and the obstruction of oil tanker traffic through the strategic Strait of Hormuz added to the concerns. Iran had urged the US to concede defeat, while President Trump had urged Americans to brace for higher gasoline prices due to the ongoing conflict.

Brent crude held steady at US$88.50 a barrel, after climbing 6% the week before, while US crude edged down 0.3% to US$82.12 a barrel, having gained 5.4% over the same period. Progress in resolving the Iran/Hormuz impasse remained elusive, so the base case still anticipated oil prices to remain within a US$70-US$100 range. Should Iran persist in preventing a sustainable peace deal, the flow of Middle Eastern oil would remain diminished, and higher oil prices would have to be expected as reserves continue to diminish.

MSCI's expansive Asia-Pacific index outside Japan saw a flat performance, while Japan's Nikkei index rose by 0.4%. Shares in Australia, which are resource-intensive, slipped by 0.3%. South Korea's stock markets were on a public holiday on Monday. President Trump had directed the Pentagon to significantly reduce joint military exercises with South Korea.

Market attention was now focused on China's July economic data release, with forecasts pointing to a slowdown in industrial output growth to 4.8%, down from 5.3%, and retail sales likely increasing by 1.5%. European indices, such as EUROSTOXX 50 futures, rose by 0.2%. The S&P 500 futures increased by 0.1%, having hit a record high the previous week, while Nasdaq futures gained 0.2%.

The bullish trend in stocks was fueled by the declining likelihood of the Federal Reserve hiking interest rates next month, now seen as a 69% probability after a flood of weak data. US retail sales declined for the first time in nine months in July, and consumer sentiment worsened more than expected, dampening the Fed's motivation to raise rates immediately.

The primary data point this week was the August S&P Purchasing Managers' Indexes (PMIs) to ascertain if the mid-year uptick in US business activity would persist. Earnings were lighter this week but included Home Depot, Target, and Walmart, prompting investors to evaluate the strength of US consumers. In the bond markets, US Treasury yields decreased on Monday after finishing the prior week mixed.

The two-year US Treasury yield slipped 2 basis points to 4.156%, having fallen 3 basis points last week to a seven-week low of 4.0977%. The yield on the ten-year US Treasury fell by 1 basis point to 4.684%, after rising 4 basis points the previous week. The subdued data had put downward pressure on the US dollar, with the euro up 0.1% at US$1.1578, just short of a two-month peak of US$1.1585.

The dollar declined by 0.1% against the yen to 159.15. In commodity markets, gold remained at US$4,381 an ounce, having climbed 0.8% the previous week.