Most equity markets across Asia logged gains on Tuesday, yet trading remained well below the best levels reached during the session as market participants grappled with mixed diplomatic signals about a possible easing in hostilities involving Iran.
Global risk sentiment had received an initial boost from U.S. markets, which surged Monday following a White House statement that talks with Iran about ending the conflict were "positive." That optimism was later dented in Asian trading when S&P 500 futures slipped about 0.7% after Iranian officials largely denied that such talks had taken place.
Meanwhile, hostilities involving Iran, Israel and neighbouring states persisted into the early hours of Tuesday, and oil prices climbed back as the confrontation entered its fourth consecutive week. The fragility of diplomatic signals and the ongoing military activity kept traders cautious, limiting the upside available to regional stocks.
Japan: inflation surprise softens but underlying pressures remain
Japan's equity benchmarks outperformed on the day, with the Nikkei 225 up about 0.7% and the TOPIX rising roughly 1.1%, although both indexes gave back a sizeable portion of their intraday gains before the close.
That move followed government data showing consumer price index inflation in February expanded at the slowest rate in nearly four years, while core inflation dipped below the Bank of Japan's 2% annual target. The drop in headline CPI was attributed in large part to government subsidies for energy and food, though underlying inflation metrics were described as still elevated.
Analysts at Capital Economics said the February release was unlikely to materially change market expectations for the BOJ's policy path, particularly because the government subsidies are scheduled to expire in April. The brokerage therefore continues to project an interest rate increase from the BOJ next month.
Additional data showed that Japan's manufacturing purchasing managers index expanded in early March, but at a slower-than-expected pace, and services-sector growth also cooled. Those mixed domestic signals presented another reason for investors to take profits after early rallies.
Regional moves: initial rallies fade as risk aversion resurfaces
Across the region, gains were widespread but constrained. South Korea's KOSPI ended the day about 1.3% higher after earlier jumping as much as 4.5%; the index had briefly slipped into negative territory during the session and was still recovering from a steep 6.5% drop logged in the prior session. Market participants also showed caution over the prospect of a more hawkish stance at the Bank of Korea under incoming Governor Shin Hyun-song.
China's Shanghai Shenzhen CSI 300 and the Shanghai Composite added roughly 0.6% and 0.8%, respectively, while Hong Kong's Hang Seng gained close to 1.4%. Australia’s ASX 200 rose around 0.5%, Singapore’s Straits Times was essentially flat, and futures on India's Nifty 50 traded about 1.4% lower in Asian hours.
Diplomatic ambiguity and energy implications
Senior Iranian officials mostly denied U.S. claims that direct talks had occurred, even as some reports indicated there were intermediated communications. Specifically, while direct face-to-face talks were not reported, certain Asian and Gulf states were said to be relaying messages between Tehran and Washington.
Markets have broadly weakened since the outbreak of the conflict, reflecting concerns that major Asian economies, which rely heavily on imported oil and gas, would face supply shocks and higher energy costs if disruptions persist. Iran's control of or interference with the Strait of Hormuz was highlighted as a particular vulnerability, given its potential to restrict a significant share of the world's oil flows.
Investors also remained sensitive to the inflationary consequences of sustained energy-price pressure, particularly after several major central banks signalled last week that interest rates might rise in response to energy-driven inflation. Those signals contributed to the recent market sell-off and remain a factor restraining a full risk-on recovery across Asian equities.
Outlook
For now, Asian markets are navigating a combination of geopolitical uncertainty, mixed regional economic data and central bank signalling. That three-way interaction - diplomatic noise from the Middle East, softer-than-expected inflation prints in Japan coupled with persistent underlying price pressures, and the prospect of tighter monetary policy elsewhere - is keeping trading cautious and volatile.
Traders and investors will likely continue to monitor developments on the diplomatic front, energy-price trends and upcoming central bank signals closely, as those factors will be key to whether regional equities can rebuild lost ground or remain under pressure.