Asian stocks edge higher as hawkish Fed, elevated yields and geopolitical cap upside

Asian stocks rise modestly on Thursday as elevated US bond yields keep a lid on the optimism.
The hawkish Fed calms the recent bond market selloff, though oil-driven inflation fears remain.
Geopolitical risks further weigh on investors’ sentiment ahead of BoE and BoJ policy meetings.

Haresh Menghani FXStreet

Shares edged higher in Asia on Thursday, tracking US stock futures, as traders digest the Federal Reserve's (Fed) hawkish tilt ahead of other key central bank events. The Bank of England (BoE) is scheduled to announce its policy decision later today, while the Bank of Japan (BoJ) is widely expected to raise borrowing costs at the end of a two-day meeting on Friday.

Meanwhile, the US Federal Reserve (Fed) voted unanimously to raise interest rates for the first time since 2023 at the conclusion of the September policy meeting on Wednesday. Moreover, the so-called dot plot revealed that Fed officials expect one more interest rate increase this year. Meanwhile, Fed Chair Kevin Warsh’s focus on inflation helps calm the recent bond-market selloff and lift investors' sentiment.

Speaking at the post-meeting press conference, Warsh underscored the importance of stabilizing consumer prices to grow the US economy, saying that inflation is too high and has been for too long. However, oil-driven inflation risks keep the yield on the benchmark 10-year US government bond pinned near 5.0%, close to its highest level since 2007. This, along with Middle East tensions, caps the optimism.

In the latest developments, Iran-backed Houthi rebels said that Saudi aircraft have carried out more than 450 air strikes across Yemen in the past week. Meanwhile, US President Donald Trump claimed that Iran wants to strike a deal and that the war may be nearing its end. Nevertheless, intensifying fighting between the Houthi group and Saudi Arabia keeps the geopolitical risk premium in play.

Asian stocks FAQs

Which are the main stock market indices in Asia?

Asia contributes around 70% of global economic growth and hosts several key stock market indices. Among the region’s developed economies, the Japanese Nikkei – which represents 225 companies on the Tokyo stock exchange – and the South Korean Kospi stand out. China has three important indices: the Hong Kong Hang Seng, the Shanghai Composite and the Shenzhen Composite. As a big emerging economy, Indian equities are also catching the attention of investors, who increasingly invest in companies in the Sensex and Nifty indices.

What are the main sectors represented in Asian stock markets?

Asia’s main economies are different, and each has specific sectors to pay attention to. Technology companies dominate in indices in Japan, South Korea, and increasingly, China. Financial services are leading stock markets such as Hong Kong or Singapore, considered key hubs for the sector. Manufacturing is also big in China and Japan, with a strong focus on automobile production or electronics. The growing middle class in countries like China and India is also giving more and more prominence to companies focused on retail and e-commerce.

What factors drive Asian stock markets?

Many different factors drive Asian stock market indices, but the main factor behind their performance is the aggregate results of the component companies revealed in their quarterly and annual earnings reports. The economic fundamentals of each country, as well as their central bank decisions or their government’s fiscal policies, are also important factors. More broadly, political stability, technological progress or the rule of law can also impact equity markets. The performance of US equity indices is also a factor as, more often than not, Asian markets take the lead from Wall Street stocks overnight. Finally, the broader risk sentiment in markets also plays a role as equities are considered a risky investment compared to other investment options such as fixed-income securities.

What are the risks of investing in Asia stock markets?

Investing in equities is risky by itself, but investing in Asian stocks comes along with region-specific risks to be taken into account. Asian countries have a wide range of political systems, from full democracies to dictatorships, so their political stability, transparency, rule of law or corporate governance requirements may diverge considerably. Geopolitical events such as trade disputes or territorial conflicts can lead to volatility in stock markets, as can natural disasters. Moreover, currency fluctuations can also have an impact on the valuation of Asian stock markets. This is particularly true in export-oriented economies, which tend to suffer from a stronger currency and benefit from a weaker one as their products become cheaper abroad.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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