Asian Markets Climb Amidst Rate Cut Expectations, Tensions Escalate in Yemen

Asian markets experienced gains on Monday as investors assessed US inflation data, reigniting optimism for an early interest rate cut. However, these positive developments were tempered by geopolitical concerns following recent US-UK strikes on Huthi targets in Yemen, as reported by APP.

The fresh attacks on Iran-backed rebels occurred after their threats of further assaults on Red Sea shipping in response to similar actions by Western forces on Friday. This situation led to a 4% surge in oil prices on Friday, with fluctuations continuing on Monday due to increased non-OPEC production and indications of a global economic slowdown.

As the crisis unfolds, compounded by Israel's conflict with Hamas in Gaza, there are growing fears of a regional conflict disrupting trade routes and causing crude oil prices to surpass $100. Bloomberg noted that over 350 oil tanker owners have paused Red Sea journeys, with more likely to follow as Western forces issue warnings to stay away.

Concerns about the crisis escalating into a wider conflict and driving up energy prices have sparked worries of a potential resurgence in inflation. Despite a decline in inflation throughout the previous year, central banks are now contemplating interest rate cuts.

Friday's data revealing a third consecutive monthly drop in US producer prices, the most extended run since 2020, boosted expectations of a rate cut in the first quarter. The producer price index provided a positive turn for traders following a higher-than-expected consumer price index, a surge in job numbers, and Federal Reserve minutes suggesting a commitment to keeping rates elevated.

The figures contributed to a decrease in Treasury yields, with traders now factoring in an 80% likelihood of monetary policymakers implementing a cut as early as March, compared to 62% the previous week. The market anticipates nearly 170 basis points in reductions for 2024.

On Wall Street, the three main indexes closed slightly higher on Friday. Financials, however, were a drag as corporate reports warned of lower interest income due to declining Fed borrowing costs.

In the Asian markets, Tokyo extended last week's gains, with the Nikkei breaking above 35,000 for the first time since 1990, fueled by a resurgence in inflation and a weaker yen benefiting exporters. Hong Kong and Shanghai also experienced rare gains, supported by China's central bank's decision not to cut short-term interest rates but inject billions of dollars into financial markets.

Taipei saw an increase following the victory of pro-sovereignty candidate Lai Ching-te in Taiwan's presidential election. However, Lai's Democratic Progressive Party (DPP) lost its legislative majority, likely necessitating collaboration with smaller parties, including the pro-China Kuomintang, leading to compromises.

Saxo Markets' Redmond Wong noted, "Lai's modest winning margin and the legislative impasse suggest limitations on pursuing radical agendas, especially regarding Taiwan's independence." Wong added that a pragmatic approach might involve maintaining the status quo and facilitating de-escalation, potentially alleviating immediate concerns of heightened cross-strait tensions.