Asian equity markets rallied broadly on Thursday, with key indexes reaching fresh highs as traders embraced the possibility of a diplomatic breakthrough in the Middle East. Japan's benchmark leapt back into action after a lengthy holiday, pushing the Nikkei past the 62,000 mark for the first time as investors caught up with an AI-led advance that has also driven South Korean and Taiwan markets to record territory.
MSCI's gauge of Asia-Pacific shares outside Japan climbed 1% to a new peak, extending the index's gain to roughly 7% for the week. The surge was driven in part by robust corporate results in the technology sector and the easing of geopolitical risk sentiment after reports that Iran is reviewing a peace proposal that could formally end the war.
Market participants welcomed the prospect of de-escalation, but many flagged that key issues remain unresolved. The reported proposal does not settle major U.S. demands that Iran suspend its nuclear program or guarantee reopening of the Strait of Hormuz - a strategic choke point whose closure had previously pushed oil sharply higher. The uncertainty around those outstanding items keeps energy markets and global supply-chain concerns squarely on investors' radars.
Oil volatility was a central feature of market moves. A potential agreement to end the conflict triggered a steep pullback in crude prices, with oil dropping nearly 8% on Wednesday before Brent crude was quoted a touch higher at $102.11 a barrel in early Asian trading on Thursday. Despite the recent decline, analysts note that oil remains roughly 40% above levels seen when the conflict began, keeping inflationary pressures and energy-cost risks elevated for companies and consumers alike.
Bond markets reflect similar caution. Ten-year U.S. Treasury yields sit about 40 basis points higher compared with pre-conflict levels, underscoring the challenge elevated energy prices pose to inflation and interest-rate dynamics. Policymakers have taken note; Federal Reserve officials have warned that the war raises the risk of a sustained inflation shock amid persistent oil strength and rising concerns over global supply-chain frictions.
Currency markets showed notable moves as well. The euro retained overnight gains and was trading around $1.1747, while sterling changed hands near $1.3591 after a modest advance. The dollar index, which tracks the U.S. currency against a basket of six peers, was near 98.032 as risk appetite supported non-dollar assets.
The yen remained prominent in market discussion after recent abrupt moves prompted speculation that Japanese authorities may be intervening to support the currency. The yen was last quoted at 156.29 per dollar, little changed on the day but off a sudden jump to a 10-week high around 155 in the prior session. Analysts at OCBC highlighted the critical question of whether Japan's Ministry of Finance will continue to defend the yen or has already expended sufficient resources. They argued that intervention alone is unlikely to alter the broader trend without firmer policy backing such as a more assertive Bank of Japan tightening cycle or more favorable external conditions such as lower oil prices and softer U.S. yields.
Market breadth was also aided by another strong night on Wall Street. The S&P 500 and the Nasdaq closed at record highs following better-than-expected corporate reports, and S&P 500 companies are on course for their strongest profit growth in more than four years. That earnings momentum has helped reinforce the risk-on stance among global investors after a fragile ceasefire and the flip from panic to cautious optimism over the conflict.
Looking ahead, traders will be focused on upcoming economic data that could influence the durability of the rally. Investors awaited the U.S. non-farm payrolls report, with a Reuters survey pointing to an expected increase of 62,000 jobs in April after a rebound of 178,000 in March. The payrolls print and any subsequent signs on inflation or labor-market strength could have outsized effects on yields, currency flows and equity valuations.
For now, markets are balancing the relief associated with possible diplomatic progress against the ongoing structural pressures from higher energy costs and elevated yields. Analysts cautioned that while a deal would be a meaningful breakthrough, previous episodes show the market can reverse quickly if talks falter or key demands remain unmet. Until those outstanding issues are resolved, market participants said they expect heightened sensitivity to both geopolitical headlines and incoming economic data.
Sector impact summary
- Technology - earnings strength has been a primary driver of the recent risk-on rally, lifting major equity indexes.
- Energy - crude volatility remains central, with oil prices still markedly higher than pre-conflict levels and influencing inflation expectations.
- Financials and rates-sensitive sectors - higher 10-year yields are reshaping valuations and imposing pressures on sectors sensitive to borrowing costs.