AI Rally Sparks Risk-On Mood Across Asian Markets

Global Mood: Risk-on 
Drivers: AI optimism, BoJ Policy, Geopolitics

Asia-Pacific markets staged a strong rally on Friday as investors embraced a risk-on mood, encouraged by robust earnings from Microsoft and Amazon that reinforced expectations of sustained investment in artificial intelligence infrastructure. Technology and semiconductor stocks led the advance, with South Korean and Japanese equities posting sharp gains after a strong rebound on Wall Street. The rally suggested investors were willing to look beyond mounting geopolitical risks and instead focus on corporate earnings, AI-driven growth prospects and the monetary policy outlook.

The rebound in chipmakers also reflected expectations that spending by major technology companies on data centres and cloud infrastructure will remain resilient. Investors were simultaneously monitoring the Bank of Japan's policy decision and developments in currency markets after authorities intervened to support the yen. 

THE BIG STORY
The US-Iran war edged toward a dangerous new front as Egypt confirmed an unidentified drone struck two gas vessels at Damietta port, near the mouth of the Suez Canal — the last major export route for Saudi oil still functioning alongside Hormuz and Bab al-Mandeb both under threat. No group claimed responsibility, but the strike raised the spectre of Suez disruption that would effectively close off Saudi crude from global markets entirely. Overnight, the US struck IRGC command centres and drone facilities across Iran, while Iran fired on US bases in Jordan and Kuwait, killing a Chinese worker in a strike on a building in northern Kuwait. Iran claimed to have hit F-35s at Azraq air base in Jordan, which the US military flatly denied. The conflict is now simultaneously active across Iran, Iraq, Jordan, Kuwait, Yemen, Saudi Arabia, and Egypt, with no diplomatic framework in place and oil prices elevated above $90.

Trump declared a "historic" Hamas disarmament agreement reached in Cairo talks, though the announcement was immediately complicated by Israeli scepticism, a Hamas official describing it as a draft, and a dispute over whether weapons would be surrendered or merely stored under Palestinian administration. Israel said it had already rejected the proposal as insufficient. Meanwhile, Ukraine's envoy to Washington said Kyiv needs Patriot missiles now, warning that Russia is firing 30 to 40 ballistic missiles per night and that domestic Patriot production under the licence Trump approved could take up to five years to materialise, far too slow for a country facing a potentially brutal winter under relentless bombardment.

Data Spotlight
The US economy expanded at an annualised 1.5% in Q2 2026, below Q1's 2.1% and forecasts of 2.1%, as net trade subtracted a larger drag and government spending fell 0.8% following Strategic Petroleum Reserve sales. Consumer spending accelerated sharply to 3.2% from 0.5%, led by prescription drugs, vehicles and food services, while equipment investment remained robust at 15.2%. Residential investment rose 1.5%, its first increase in six quarters.

The US PCE price index fell 0.1% month-on-month in June, as expected, as goods prices dropped 0.6% and services inflation slowed sharply to 0.1%. Annual headline PCE eased to 3.7% from 4.1%, while core PCE edged down to 3.3% from 3.4%, both in line with forecasts.

The Bank of England held its Bank Rate steady at 3.75% in July, with a 6-3 vote as three members favoured a hike to 4.0%. The BoE expects inflation to rise again later this year as West Asia-driven energy costs feed through, and flagged upside inflation risks from geopolitical uncertainty while noting limited second-round effects so far.

Takeaway: Slowing US GDP growth and easing PCE inflation point to a gradual cooling of the economy, though resilient consumer spending complicates the disinflationary narrative. Both the Fed and BoE face similar dilemmas, holding rates steady against hawkish dissents while West Asia energy risks keep the inflation outlook skewed to the upside.

WHAT HAPPENED OVERNIGHT

US stocks surge as Microsoft's blowout forecast eases AI spending fears

• The S&P 500 climbed 1.66%, Nasdaq gained 2.78%, and the Dow rose 1.19%, as Microsoft's stellar results reversed the prior session's sharp selloff.
• Microsoft jumped over 15%, its biggest single-day gain in 18 years, adding $450 billion in market value, the greatest-ever single-day increase for a Wall Street company, after forecasting above-estimate sales, cloud growth, and below-estimate capex.
• The Philadelphia Semiconductor Index surged 8.2%, with Micron jumping 18%, SanDisk soaring 26%, and AMD up 13%, as Microsoft's results eased fears over AI infrastructure returns.
• September Fed hike odds fell to 59% from 82% a week ago, as Warsh's mixed messages at Wednesday's press conference left traders uncertain about the rate path ahead.
• US April-June GDP grew at just 1.5%, below the 2.1% estimate, as the trade deficit widened, while a separate reading showed inflation slowed in June.

US Treasury yields climb back to January 2025 highs as markets digest hawkish Fed signals

• The 10-year yield edged up to 4.69% while the 30-year surged to 5.23%, its highest in 19 years, reflecting concerns over inflation and interest rates.
• The rise in bond yields followed the Federal Reserve's decision to keep interest rates unchanged. 
• Fed Chair Kevin Warsh's mixed signals on inflation and monetary policy clouded the outlook for future rate decisions.

US Dollar falls to six-week low as Warsh's ambiguous guidance trims near-term hike bets

• The dollar index dropped to 100.3, its lowest in six weeks, extending the prior session's 0.6% decline.
• The Fed held rates as expected, but three FOMC members voted for an immediate 25bps hike, signalling a growing hawkish minority within the committee.
• Warsh was not among the dissenters and refrained from offering clear forward guidance, leaving investors uncertain about the timing of the next move.
• Markets increasingly view the hold as a delay rather than a pivot, with September hike odds falling to 55% from 80% before the decision.

Oil settles lower after volatile session as Saudi-led maritime coalition proposal tempers supply fears

• Brent settled at $89.03/bbl, down 1.88%, and WTI at $83.59, down 1.03%, after both benchmarks hit session highs of $93.31 and $85.94, respectively, amid fresh US-Iran strikes.
• Iran and Oman continued talks on Hormuz management despite Iran's rejection of Oman's joint management proposal, with analysts noting progress may be underway on reopening the strait.
• The US military struck dozens of IRGC targets in Iran and denied Iranian claims that three F-35s and other aircraft were destroyed, helping lower the temperature on the escalation.
• Houthis attacked Saudi oil facilities in the eastern province from Iraqi territory in coordination with Iraqi armed groups, reflecting growing Iran-aligned militia coordination.
• A drone attack caused a fire at Egypt's Damietta port engulfing two gas vessels, while a Ukrainian drone hit Lukoil's Perm refinery, forcing shutdown of a crude distillation unit.
• Tankers planned for loading at the CPC terminal are heading away from the Black Sea after a vessel was hit during loading, adding another supply disruption front.

Day’s Ledger*
Economic Data

• China July Manufacturing PMI
• China July Composite PMI
• Euro Zone July CPI
• India Weekly FX Reserves Data
• India Govt Finances 
  
  Corporate Actions
  

• Earnings: Aditya Birla Capital, ABB India, Bajaj Finserv, GAIL (India), Glenmark Pharmaceuticals, Indian Oil Corporation, ITC, Maruti Suzuki India, National Aluminium Company, Sun Pharmaceutical Industries

Policy

• Bank of Japan Interest Rate Decision
• BoE MPC Member Pill Speaks

Tickers to Watch

• ASTRA MICROWAVE PRODUCTS received an order worth ₹22.05 billion from HAL to supply 122 active antenna array units and 121 interface frames for the Uttam radar programme.
• GARDEN REACH SHIPBUILDERS & ENGINEERS secured an order worth ₹10.32 billion from ONGC to build four platform supply vessels over 48 months.
• LIC HOUSING FINANCE reported April-June net profit rose 9.9% on year, while net interest income increased marginally.
• MAHINDRA & MAHINDRA incorporated step-down subsidiary Novavayu Aerospace Ltd for aerospace products, while subsidiary Mahindra Last Mile Mobility attained unicorn status with a valuation of ₹108.22 billion and plans to raise ₹3.22 billion from investors, including Lightrock.
• MAZAGON DOCK SHIPBUILDERS reported April-June net profit rose 21.5% on year to ₹5.49 billion, while revenue increased 12.1% to ₹29.43 billion.
• P N GADGIL JEWELLERS launched a qualified institutional placement with a floor price of ₹640.69 per share and may offer a discount of up to 5%.
• RAILTEL CORP OF INDIA reported April-June net profit remained largely unchanged at ₹660 million, despite double-digit growth in revenue and operating profit.
• SWIGGY reported an April-June consolidated net loss of ₹7.91 billion, compared with a loss of ₹11.97 billion a year earlier.
• TATA STEEL reported April-June consolidated net profit rose 11.6% on year to ₹23.18 billion.
• TORRENT PHARMACEUTICALS reported April-June net profit rose 3.3% on year to ₹5.66 billion, while revenue increased 54.8% to ₹49.21 billion. 

Must Read

• Fed’s Warsh Says Play the Ball, Markets Call Foul
• The Hidden Reason SEBI Split India's Market Close
• When Eminence Is Not Enough
• India Economy is Growing, But Data Gives a Reality Check on Youth Employment
• The Market Is Pricing the RBI, Not Inflation
• Is SBI's AT1 Issuance A Blip Or Are Banks Back on The Bond Street?

(*Compiled from various media sources)

See you tomorrow with another edition of The Morning Edge.

Have a great trading day