Asia Eyes Calm Open as All-Out Conflict Risks Ease: Markets Wrap

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(Bloomberg) — Asian stocks are poised for a cautious open as fears subsided that Israel’s war against Iran would escalate into a wider conflict, with reports that Tehran wants to restart talks over its nuclear program.

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Equity futures pointed to small gains in Tokyo and Hong Kong, and a flat open in Sydney, as risk-on sentiment returned to Wall Street on Monday and pushed the S&P 500 up about 1%. Oil continued to decline in early Asia trading on signs that the conflict in the Middle East may avoid disrupting crude production.

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There were mixed signs that investors will keep faith in the US economy, as longer-maturity Treasuries continued to lag the market even after a $13 billion sale of 20-year bonds drew the expected yield level — a notable improvement from last month’s auction disappointment that spurred a broad selloff. The dollar was little changed.

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President Donald Trump said Iran wants to talk about de-escalating the conflict with Israel even as the two sides exchanged fire for the fourth consecutive day. Asked if the US would get more involved militarily, the US leader said he didn’t want to discuss it.

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Tehran is signaling it wants to de-escalate hostilities with Israel and is willing to resume nuclear talks with the US as long as Washington doesn’t join the Israeli attacks, the Wall Street Journal reported Monday citing Middle Eastern and European officials it didn’t identify. A similar report by Reuters says Iran conveyed the message through Qatar, Saudi Arabia and Oman.

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The outbreak of hostilities between Israel and Iran disrupted the momentum that had driven the S&P 500 back near record levels. While markets initially adopted a cautious, risk-off stance to assess how the conflict might unfold, sentiment improved on Monday as investors speculated the attacks were unlikely to draw in more parties.

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“Focus will remain on geopolitical headlines, but as long as the conflict stays limited between Israel and Iran, it’s unlikely to materially impact the markets,” said Tom Essaye at The Sevens Report.

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Investors in Asia will be keeping an eye on the Group of Seven summit in Alberta, Canada, where Trump met with Japanese Prime Minister Shigeru Ishiba on Monday. Tokyo is seeking a full removal of tariffs imposed by the US, including a 25% levy hitting crucial auto industry exports. Without a deal, the world’s fourth-largest economy could tip into a technical recession.

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The mood in China was boosted on Monday as data showed unexpectedly strong retail sales in May gave the economy some relief from US tariffs. Still, the momentum may not last as deflationary forces persist and a housing market slump shows signs of deepening.

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Despite the calmer market sentiment, the Middle East remains tense. Israel launched an attack on the South Pars gas field, forcing the halt of a production platform, following strikes on Iran’s nuclear sites and military leadership last week. However, critical crude oil-exporting infrastructure has so far been spared and there’s been no blockage of the vital Strait of Hormuz.