By Wayne Cole
SYDNEY, July 1 (Reuters) – Asian share markets started the new quarter in a cautious mood on Wednesday as talks between the United States and Iran hit new hurdles, while investors stayed alert for possible Japanese intervention as the yen plumbed fresh 40-year lows.
Tehran said on Tuesday it would not meet with top U.S. envoys who had flown to the region, with the two sides still far apart on a framework that would fully open the Strait of Hormuz.
Bond markets were also under pressure after U.S. Treasury yields spiked overnight as futures narrowed the odds on rate hikes from the Federal Reserve ahead of crucial jobs figures on Thursday.
All eyes will thus be on Fed Chair Kevin Warsh when he appears at a European Central Bank conference later in the session, for any guidance on the need for a tightening.
Unfortunately for traders, Warsh has long been against the Fed providing forward guidance and may keep his policy cards close to his chest.
Futures imply a 33% probability the Fed could hike rates at its next meeting later this month, while a September move is priced between 67% and 88%.
Equity investors are betting the coming earnings season will be bright enough to offset the rate risk and continue to pile into favoured tech trades.
Japan’s Nikkei climbed another 0.8%, having surged 37% last quarter. The rush for everything tech helped boost sentiment among big manufacturers to heights not seen since 2018, while manufacturing activity boasted its best quarter since 2014 as new orders surged.
South Korea’s main index slipped 0.9%, having risen an eye-watering 68% in the second quarter on soaring AI-related demand for semiconductors.
The boom delivered the fastest export growth in nearly 50 years in June as shipments of semiconductors surged almost 200%. As a result, South Korea became the fourth country in the world to reach a monthly export value of $100 billion, after Germany, China and the United States.
MSCI’s broadest index of Asia-Pacific shares outside Japan firmed 0.2%, while Chinese blue chips rose 0.3%.
In Europe, EUROSTOXX 50 futures and DAX futures were flat, while FTSE futures dipped 0.3%. S&P 500 futures and Nasdaq futures both eased 0.2%, after making solid gains overnight.
LOT RESTING ON EARNINGS
A pause was understandable given Wall Street just notched up its biggest quarter since 2020, led by an 88% climb in the Philadelphia Semiconductor Index.
“The historical record certainly favours the bulls,” noted Chris Weston, head of research at broker Pepperstone. “Since 2008, Nasdaq futures have recorded only one negative July.”
“The upcoming earnings season will therefore be critical in determining whether earnings expectations continue to improve and whether portfolio allocations continue shifting towards technology.”
The major banks kick off reporting from mid-July, and analysts have high expectations for profits in the tech sector and more broadly.
Analysts at Goldman Sachs note the consensus is for earnings per share to grow 22% on a year earlier. AI infrastructure stocks are expected to contribute nearly 60% of S&P 500 EPS growth, with Micron and Nvidia together accounting for more than 40%.
Strong earnings will be needed to offset the attractiveness of higher bond yields and the risk of a rise in the cash rate. Yields on 10-year Treasuries stood at 4.55%, having jumped almost 9 basis points on Tuesday. [US/]
The rise helped lift the dollar to a fresh four-decade peak on the yen at 162.84, extending a bull run that stretches back to early May.
The climb has drawn the usual threats of intervention from Tokyo, though the authorities seem reluctant to act, having spent almost 12 trillion yen through April and May to little lasting effect.
Tim Baker, a macro strategist at Deutsche Bank, noted the latest move had been more about dollar strength than yen weakness, with the yen having been broadly steady against other major currencies for months now.
A steep slide in oil prices had also benefited Japan greatly as a net energy importer, he added, while real yield spreads had widened slightly in the yen’s favour.
“The upshot is that our fair value model has steadily dropped, now sitting in the low 150s,” said Baker. “Japan policymakers may be sitting back and hoping for dollar strength to cease, so we think yen weakness will be limited from here.”
The euro was flat at $1.1409, just above the recent 13-month trough of $1.1325.
Inflation data for the European Union due later are forecast to show a dip to 3.0% in May, from 3.2% the previous month, and a further decline is likely as lower oil prices feed through.
Investors no longer think a July rate rise is likely from the ECB, putting the chance at just 32%. Indeed, markets imply that one further hike to 2.5% could mark the end of this tightening cycle.
As for oil, Brent crude was up 0.3% at $73.19, but a world away from its May peak of $126.41, while U.S. crude added 0.4% to $69.74 a barrel.
Gold remained out of favour after a very tough quarter, easing 0.7% to $3,977 an ounce. [GOL/]
(Reporting by Wayne Cole; Editing by Shri Navaratnam)
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