Asian markets opened lower on Monday, with MSCI's broadest index of Asia-Pacific shares outside Japan dipping 0.3%. South Korea's chip-heavy KOSPI fell 4.2% after a nearly 9% decline last week, while Japan's Nikkei, closed for a holiday, had shed 6.4% last week. Chinese blue chips went against the trend, rising 1.4%. This broad market weakness was largely attributed to the escalating conflict between the US and Iran, which propelled Brent crude prices above $90 a barrel for the first time in over a month, triggering renewed inflation fears even after recent downside surprises in US consumer price data.
The rise in oil prices is seen as a significant concern, pushing the 30-year Treasury yield above 5.0%, a level that often reroutes funds from equities to fixed income. Futures markets now imply a 60% chance of a Federal Reserve rate hike as early as September and about 29 basis points of tightening by year-end, driven by a hawkish shift in policy rhetoric. JPMorgan's chief economist, Bruce Kasman, noted an increasing risk of an earlier Fed hike than their forecast for a gradual turn in 2027. The European Central Bank, meeting on Thursday, is expected to hold rates at 2.25% but faces the headache of renewed energy inflation.
Investor sentiment was further impacted by scrutiny of the sky-high valuations of semiconductor and AI stocks. The Philadelphia Semiconductor Index dropped 10% last week, leaving it 20% down from its June peak. Concerns were exacerbated by Chinese AI firm Moonshot's launch of its Kimi K3 model, which raised questions about the capital-intensive build-out model for the AI industry. Attention is now focused on upcoming earnings reports from major tech companies like Alphabet and Tesla on Wednesday, and Intel on Thursday, with analysts like BofA's Savita Subramanian expecting a 5% beat versus consensus, driven by technology and a projected 130% rise in semiconductor earnings year-on-year. However, the market demands more than just meeting estimates, amid the dual pressures of oil price shocks and rising interest rates.
