Title: Cautious Start to the Week in Asian Markets as Israel-Gaza Conflict Intensifies
Subtitle: Bond Market Sell-off Continues while Oil Prices Ease
Date: May 4, 2023
In a cautious start to the week, Asian markets are closely monitoring the escalating conflict between Israel and Gaza, awaiting the possibility of a ground invasion. Additionally, bond markets are facing a relentless sell-off, while oil prices experienced a temporary decline due to progress in aid deliveries.
Israel’s military continued its bombardment of Gaza on Sunday and clashed with Iran-backed Hezbollah on the border with Lebanon, intensifying fears of further escalation in the region.
To address the situation, the leaders of the United States, Canada, France, Germany, Italy, and Britain expressed their support for Israel’s right to defend itself. They also stressed the importance of adhering to international humanitarian law and safeguarding civilian lives.
Although some aid trucks managed to get through, prompting a momentary dip in oil prices, the bond market remained unimpressed. U.S. 10-year yields crept back up to 4.967%, following a surge of almost 30 basis points the previous week.
Investors, seeking higher real yields and term premia, speculate that the market is adjusting to a new normal for interest rates, potentially higher than the Federal Reserve’s target of 2.5%.
Furthermore, concerns are growing over the scale of U.S. borrowing, as Washington reported a $1.695 trillion budget deficit for fiscal 2023. This figure is significantly higher than the previous year and all pre-pandemic shortfalls.
Yields in Japan have also risen, fueled by discussions within the Bank of Japan regarding a potential tweak to its yield curve control policy. The outcome of these deliberations may be announced at the bank’s upcoming policy meeting on October 31.
As borrowing costs rise globally, the market has largely discounted the possibility of a rate hike by the Federal Reserve next week. There is now a nearly 70% chance that the tightening cycle has reached its end.
Similarly, expectations of a rate hike by the European Central Bank are dwindling, and there is increasing speculation about rate cuts starting in April next year.
The surge in bond yields is also putting pressure on equity valuations, with upcoming earnings reports anticipated to test market expectations. Mega-cap companies like Microsoft, Alphabet, Amazon, and Meta will be reporting this week, along with Intel, IBM, General Motors, and General Electric, among others.
Notably, no major data releases are scheduled for Monday, leaving markets to digest the ongoing geopolitical developments and bond market volatility.
In conclusion, Asian markets are cautiously navigating the intensified Israel-Gaza conflict and the ongoing bond market sell-off. As geopolitical tensions escalate, global markets brace for potential shifts in interest rate policies and their impact on equity valuations.
(Note: This article does not constitute financial advice. Please consult a professional advisor before making any investment decisions.)
Editing by Jacqueline Wong
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