(May 12): Asian equities fell after comments on a potential AI dividend in South Korea sapped sentiment in markets already weakened by President Donald Trump casting doubt on the Iran ceasefire. Crude oil rose and bonds fell.
MSCI’s Asia Pacific stock index declined 0.3% after erasing earlier gains of as much as 0.5%. The Kospi Index wiped out gains in the morning to drop as much as 5.1%. South Korea should pay all citizens a share of AI profits, a top policymaker urged. US equity-index futures also dropped after the Wall Street gauges closed at a record high on Monday.
Oil advanced after Trump threw doubts over the ceasefire with Iran, prolonging the closure of the Strait of Hormuz. Brent crude gained 1% to above US$105 a barrel as the stalled negotiations and the shuttering of the waterway indicate energy prices will stay elevated.
Higher oil prices kept Treasuries under pressure, with the 10-year yield rising one basis point to 4.42% after climbing six basis points Monday. Government bonds of similar maturity in Japan and Australia also slipped. The dollar, the haven of choice during the Middle East conflict, strengthened against all its Group-of-10 peers.
Fresh Middle East tensions are set to challenge the rally in global equities, where robust US earnings and a revival in the AI trade have driven a fresh round of upgrades to Wall Street’s year-end targets. Attention is also turning to Tuesday’s US inflation reading, which will show how much of the war-driven price pressures are feeding through and may shape the outlook for interest rates.
“Markets are pricing both AI-driven growth and the Middle East supply shock,” said Jean Boivin, head of BlackRock Investment Institute. The buildout of AI data centres is offsetting the oil supply shock’s “drag on growth”, he said.
See also: Oil climbs as US-Iran deadlock lifts bond yields
The ceasefire in the Middle East appeared to waver, with Trump calling Iran’s response to his peace proposal a “piece of garbage” and that he “didn’t even finish reading it”.
Trump didn’t indicate whether the US would resume military attacks on Iran as he previously has threatened if the Islamic Republic’s leadership didn’t agree to his terms. Trump told Fox News earlier on Monday that he’s looking at reviving a plan to escort ships through the Strait of Hormuz.
“An agreement remains elusive and risks remain elevated,” said Mark Haefele at UBS Chief Investment Office. “Both sides remain under pressure to conclude a deal.”
See also: Asian stocks advance on tech, oil climbs as US-Iran talks break down
Goldman Sachs Group Inc and Bank of America Corp were the latest in a growing cohort of Wall Street banks pushing back their forecasts for Fed rate cuts, arguing that both inflation and jobs data make a case for the central bank to stay on hold until at least the end of the year.
Traders will also be paying attention to the pound and gilt markets with Keir Starmer facing growing pressure to step down as prime minister. Focus is also on the rupee with the Indian government considering emergency steps to shore up foreign-exchange reserves, including curbing non-essential imports like gold and electronic goods.
While the Iran conflict has dragged on, the singular focus on a handful of AI leaders has kept the market remarkably immune to the latest developments in the Middle East, Tony Sycamore, a market analyst at IG Australia, wrote in a note.
The S&P 500 has surged more than 17.5% from its late-March low to a record, but just 10 stocks accounted for 69% of the gains, he wrote. Alphabet Inc, Nvidia Corp and Amazon.com Inc alone drove a third of the advance.
“The narrow breadth of this most hated rally continues to catch the eye,” he said.
Some on Wall Street are also concerned that elevated oil prices and fears about potential shortages could derail the rally.
Michael Burry, the investor made famous in The Big Short, has warned that the Nasdaq 100 Index is headed toward a dramatic reversal after a “parabolic” surge that has driven technology valuations to unsustainable heights.
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“The biggest concern is we’ve had a buffer on energy prices and there are arguments about when that stops out. When do we hit the bottom of the tanker and when does this really become an issue,” Sarah Hunt, chief market strategist at Alpine Saxon Woods, said in an interview with Bloomberg Television.
Some of the main moves in markets:
Stocks
- S&P 500 futures fell 0.2% as of 11.17am Tokyo time
- Nikkei 225 futures (OSE) rose 0.4%
- Japan’s Topix rose 0.4%
- Australia’s S&P/ASX 200 fell 0.4%
- Hong Kong’s Hang Seng rose 0.3%
- The Shanghai Composite fell 0.1%
- Euro Stoxx 50 futures fell 0.7%
Currencies
- The Bloomberg Dollar Spot Index rose 0.2%
- The euro fell 0.2% to US$1.1761
- The Japanese yen fell 0.2% to 157.56 per dollar
- The offshore yuan was little changed at 6.7926 per dollar
Cryptocurrencies
- Bitcoin fell 0.7% to US$81,196.42
- Ether fell 1.2% to US$2,310.56
Bonds
- The yield on 10-year Treasuries was little changed at 4.42%
- Japan’s 10-year yield advanced three basis points to 2.545%
- Australia’s 10-year yield advanced two basis points to 5.01%
Commodities
- West Texas Intermediate crude rose 1.2% to US$99.24 a barrel
- Spot gold fell 0.1% to US$4,729.63 an ounce
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