SINGAPORE: Global stocks began Tuesday on a cautious note while oil prices stayed elevated as the escalating conflict in the Middle East sapped risk appetite ahead of China's highly anticipated reopening after a long holiday.
The benchmark 10-year U.S. Treasury yield held above 4 per cent in early Asia trade, as a robust U.S. labour market prompted traders to heavily scale back their expectations for Federal Reserve rate cuts.
Hezbollah on Monday fired rockets at Israel's third-largest city, Haifa, and Israel looked poised to expand its offensive into Lebanon, one year after the devastating Hamas attack on Israel that sparked the Gaza war.
Heightened fears of a widespread conflict and disruptions to supply sent Brent crude futures surging above $80 a barrel for the first time in over a month in the previous session.
It was last 0.09 per cent higher at US$81.00 per barrel, while U.S. crude futures rose 0.14 per cent to US$77.25 a barrel.
"The global benchmark hit USD80/bbl as expectations grow that Israel will target Iran's oil infrastructure in retaliation for a missile attack last week. President Biden's comments didn't allay these fears," said analysts at ANZ in a note.
"We still think a direct attack on Iran's oil facilities is the least likely of Israel's retaliation options."
Still, the dour mood kept stocks on tenterhooks on Tuesday.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.05 per cent, while Tokyo's Nikkei opened 0.79 per cent lower.
S&P 500 futures tacked on 0.03 per cent while Nasdaq futures lost 0.01 per cent.
But the cautious moves in stocks could change once Chinese markets reopen after a week-long holiday later in the day. Gains and volatility could be on the cards, given Singapore-traded FTSE China A50 futures have rallied some 14% since China's cash markets closed on Sept. 30.
Hong Kong's Hang Seng China Enterprises index was up 11 per cent over the same period, pointing to a catch-up rally for the mainland.
Before the break, China announced its most aggressive stimulus measures since the pandemic, in a move which sent the CSI300 soaring 25 per cent over five sessions and sparked a rally across global share markets.
Focus will also be on a press conference from the country's National Development and Reform Commission due at 0200 GMT, for further details around the stimulus pledges that drove the market frenzy.
"Whether the outcome meets any expectations will determine if the Hong Kong market can go up further," said Richard Tang, China strategist and Hong Kong head of research at Julius Baer.
"Foreign investors had taken up their positions last week, driving a strong rally. The second leg of the rally will likely be driven by mainland Chinese purchases."
Fed bets
In the broader market, investors were also considering the future path of the Fed's easing cycle in the wake of Friday's blockbuster U.S. jobs report.
Any chance of another outsized 50-basis-point rate cut next month has since been erased and traders are even pricing in a 14.6 per cent chance that the Fed could keep rates on hold. Just 50 bps worth of cuts are priced in by December.
Reflecting the less aggressive Fed easing expectations, the two-year U.S. Treasury yield hovered near its highest level in over a month on Tuesday and last stood at 3.9764 per cent.
"While confidence about another 50bp cut is justifiably dampened... the Fed rate cut cycle is far from derailed," said Vishnu Varathan, head of macro research for Asia ex-Japan at Mizuho Bank.
"Admittedly, the all-around blockbuster jobs report is justifiable cause to reassess overzealous 'pivot bets' on front-loaded, outsized cuts."
Still, the U.S. dollar failed to get a further lift on the revised Fed expectations, having already had a strong run last week also owing to safe-haven gains linked to the Middle East conflict.
It was on the back foot in early Asia trade, falling 0.17 per cent against the Japanese yen to 147.97, while sterling rose 0.03 per cent to US$1.3089.
Against a basket of currencies, the greenback eased 0.02 per cent to 102.44, though it hovered near a seven-week high hit on Friday.
Elsewhere, spot gold was little changed at US$2,643.33 an ounce.
(Reporting by Rae Wee Editing by Shri Navaratnam)