Asian shares drift as oil gains keep inflation risks elevated

Asian shares remained stagnant on Monday as investors closely monitored oil prices, which surged significantly last week due to the ongoing Iran conflict hindering peace efforts. The lack of progress in peace talks and the obstruction of oil tanker traffic through the strategic Strait of Hormuz contributed to the elevated inflation risks, making the outlook uncertain for the region's equities.

Brent crude hovered around US$88.50 a barrel, after a 6% increase last week, while US crude dipped 0.3% to US$82.12 a barrel, following a 5.4% gain the previous week. Despite the ongoing turmoil, the consensus remains that oil prices will oscillate between US$70 and US$100, with Iran impeding a lower price point and the US attempting to stabilize the market when it surpasses US$100.

Shane Oliver, chief economist at AMP, stated this in a recent note. The prevailing concern is that the absence of a sustainable Middle East peace deal may result in oil supplies falling 10%-15% below normal levels, leading to higher oil prices as reserves dwindle. MSCI's Asia-Pacific index, excluding Japan, closed flat on Monday, while Japan's Nikkei index gained 0.4%.

Australia's resource-intensive stocks declined by 0.3%. South Korea's markets were on a public holiday on Monday. President Trump directed the Pentagon to curtail military drills with South Korea. Global market focus now shifts to China's July economic data release, with expectations of a slowdown in industrial output growth to 4.8% from 5.3% and retail sales rising by 1.5%.

Across the pond, EUROSTOXX 50 futures climbed 0.2%, while S&P 500 and Nasdaq futures increased by 0.1% and 0.2%, respectively. The stock market's bullish trend has been fueled by the diminishing likelihood of the Federal Reserve raising interest rates in the upcoming month, now assessed as a 69% probability following a series of subdued economic data.

Recent data, including a decline in US retail sales in July and a downturn in consumer sentiment, have dampened expectations of an immediate rate hike. The primary economic indicator this week will be the August S&P Purchasing Managers Index (PMI) to gauge the continuation of the mid-year US business activity surge. Earnings announcements this week are comparatively sparse, with Home Depot, Target, and Walmart being among the few companies reporting.

In the bond market, US Treasury yields experienced a decline on Monday, following a mixed finish the previous week. The two-year yield dropped by 2 basis points to 4.156%, after dropping 3 basis points last week to its lowest level in seven weeks at 4.0977%. The ten-year yield slipped 1 basis point to 4.684%, after climbing 4 basis points the previous week.

The muted economic data has exerted downward pressure on the US dollar, with the euro up 0.1% at US$1.1578, nearing a two-month high of US$1.1585. The dollar saw a 0.1% decline against the Japanese yen to 159.15. Commodity markets witnessed gold stabilizing at US$4,381 an ounce, up 0.8% from last week's gains.