Risk appetite stayed muted on Tuesday after U.S. President Donald Trump said he had stood down a planned attack on Iran and suggested there was a 'very good chance' of reaching an agreement to limit Tehran's nuclear ambitions. The comments weighed on oil, which slipped but remained around $110 a barrel - a level that is still more than 50% higher than the market saw before the Middle East war began.
Equity markets showed a cautious tone. Asian indexes declined and U.S. futures gave back earlier gains, while European futures were only marginally firmer. South Korea's benchmark Kospi dropped more than 4% in what analysts flagged as profit-taking. Attention now shifts to Nvidia's earnings due on Wednesday, where expectations for the world's most valuable company are extremely high. On the domestic data calendar, UK jobs figures for March are due later on Tuesday and could further influence sentiment.
With the Iran conflict approaching its third month, investors are increasingly worried that the disruption could translate into a persistent inflation shock. That concern has contributed to a sharp rise in sovereign bond yields, putting upward pressure on borrowing costs across the public and private sectors and threatening a severe hit to spending power for governments, companies and households.
G7 finance ministers, meeting in Paris on Monday, acknowledged growing worries about public debt and bond-market volatility. The ministers said they were looking for common approaches to address global economic strains and to coordinate supplies of critical raw materials.
The recent bond selloff eased in Asian trading on Tuesday, with U.S. Treasury yields and Japanese government bond yields slipping back somewhat, though both remain close to important highs. On average, the 10-year borrowing cost for G7 governments is nearing 4%, up from roughly 3.2% before the conflict began in late February.
Regional data were mixed. Japan's economy expanded faster than anticipated in the first quarter, driven by solid exports and household consumption, according to Tuesday's figures. Nonetheless, the nation's economic momentum faces pressure as the energy shock from the Middle East conflict works through corporate and consumer finances. The yen was trading near 159 per dollar, a level that keeps market participants watchful for possible intervention from Japanese authorities.
In Australia, the minutes from the central bank's May meeting showed policymakers viewed current interest rates as restrictive after three hikes so far this year. That assessment gives the Reserve Bank room to monitor developments around the Middle East, even as officials expect inflation to trend higher and economic growth to slow.
Near-term market movers:
- UK employment data for March.
- Nvidia quarterly results due Wednesday.
Investors are balancing tentative signs of easing geopolitical tension against the risk that the conflict will continue to fuel inflation and higher borrowing costs, keeping markets on edge.