Stocks temper gains as oil pares heavy losses, US data in focus

Stocks experienced modest gains on Wednesday, following a sharp decline in oil prices the previous day. However, the gains were dampened by a slight rebound in oil prices in Asian trading. Investors largely disregarded the market's drop on Wall Street, as they awaited the release of key US inflation data later that day. This data could significantly influence the Federal Reserve's decision on interest rates next month.

The two primary crude contracts suffered heavy losses on Tuesday, driven by lingering hopes for a resolution to the US-Iran conflict and the reopening of the Strait of Hormuz. Although negotiations were at an impasse and both parties offered conflicting statements, the restoration of part of the Saudi East-West pipeline and the Federal Reserve's decision to release more oil from the US emergency reserves provided a boost.

The pipeline had been a crucial alternative route for oil shipments from Saudi Arabia while the Hormuz was under siege.

Brent crude dropped more than two percent and West Texas Intermediate fell over three percent, plummeting below US$90 a barrel. However, both recovered slightly on Wednesday. In early Asian trading, Tokyo, Shanghai, Sydney, Seoul, Wellington, Taipei, Singapore, and Manila all rose, while Hong Kong saw a slight decline.

Chinese factory activity grew for the first time since June, but the increase in crude prices had reignited inflation concerns and put pressure on central banks to raise interest rates. This led to US 30-year Treasury yields reaching a 24-year high of 5.6%, while the 10-year yield surpassed 5.2%, their highest level since 2007. The decline in crude was expected to bolster risk, but this has not yet translated into the broader equity market.

Chris Weston of Pepperstone noted that while a diplomatic breakthrough in the Middle East seemed unlikely, oil supply and flows were gradually returning to pre-conflict levels. The release of additional barrels from the strategic petroleum reserve by the United States had driven a significant reevaluation in crude prices. Investors were now eagerly anticipating the release of October's personal consumption expenditure data, which would likely have a major impact during the Federal Reserve's policy meeting at the end of the month.

Although the jobs market remained important, officials were primarily focused on reducing inflation, and an unexpectedly high reading could prompt a second consecutive interest rate hike. New York Federal Reserve President John Williams indicated that a further rate increase was possible this year, adding that the September increase had provided policymakers with more time to consider the next round of data.