Asian Markets Mixed as Hawkish Fed Offsets Relief From US-Iran Deal

GLOBAL MOOD: Cautious Risk Off
Drivers: US–Iran Interim Deal Published, Fed Holds, Hawkish Tilt

Asian markets displayed a mixed risk sentiment on Thursday as investors weighed easing geopolitical tensions in West Asia against a more hawkish-than-expected Federal Reserve outlook. Equity gains in Japan and South Korea reflected relief after the US and Iran formally released the text of their interim peace agreement, extending the ceasefire and supporting the reopening of critical energy trade routes. The agreement reduced immediate concerns over oil supply disruptions and broader regional instability, helping sustain appetite for risk assets.

However, the positive geopolitical backdrop was partly offset by the Federal Reserve's policy guidance. While the Fed left interest rates unchanged at 3.50%-3.75%, updated projections showed policymakers increasingly expect rates to move higher in 2026, reflecting persistent inflation concerns. New Fed Chair Kevin Warsh reinforced a data-dependent approach and refrained from providing clear forward guidance, adding uncertainty around the future policy path.

The combination of reduced geopolitical risk and expectations of tighter monetary policy kept overall market sentiment balanced, with investors cautiously favouring equities while remaining alert to the prospect of higher borrowing costs and slower global growth.

THE BIG STORY
The United States and Iran formally released the text of their interim peace agreement, extending the ceasefire and opening a 60-day window to negotiate a permanent settlement. While President Donald Trump expressed optimism that the deal could help stabilise the region and lower oil prices, he also warned that the US would resume military action if Iran violated its commitments. The agreement eases immediate geopolitical risks and supports the reopening of energy trade routes, though uncertainty remains over the durability of the truce and the outcome of future negotiations.

Meanwhile, the Federal Reserve kept interest rates unchanged at 3.50%-3.75% but delivered a more hawkish message than markets expected. Updated projections showed a growing number of policymakers now anticipate a rate hike later this year as inflation remains above target. In his first press conference as Fed Chair, Kevin Warsh removed explicit forward guidance, argued that preset policy signals are ill-suited to current conditions, and announced a broad review of Fed communications, balance sheet policy and inflation frameworks. The shift reinforced expectations that monetary policy will remain data-dependent and potentially less predictable under Warsh’s leadership.

Data Spotlight  
US pending home sales surged 3.8% month-on-month in May, the steepest gain since September 2024, beating expectations of 0.8% and rising 4.8% year-on-year. All four regions posted gains, led by the Northeast, up 8.7%, and the Midwest, up 8.1%, signalling growing buyer acceptance of mortgage rates above 6%. Inventory constraints, however, continued to push home prices higher.

US retail sales rose 0.9% month-on-month in May, beating forecasts of 0.5% and accelerating from April's 0.4% gain. Gasoline stations led growth at up 3.4%, reflecting rising fuel costs tied to the conflict in West Asia, while the GDP-linked control group rose a firm 0.7%.

Takeaway:
The Fed's hawkish tilt, with inflation revised sharply higher and rate cuts off the table, signals a prolonged restrictive policy environment. Yet retail sales and pending home sales both beat expectations, pointing to underlying consumer resilience even as West Asia-driven inflation and elevated mortgage rates continue to weigh on the broader outlook.

WHAT HAPPENED OVERNIGHT

• US stocks fall as hawkish Fed signals rate hikes later this year
  • The Dow fell 0.98%, the S&P 500 lost 1.21%, and the Nasdaq dropped 1.34% after the Fed's hawkish tilt rattled markets.
  • The Fed held rates at 3.50%-3.75% as expected, but nine officials projected at least one rate hike by year-end, with previous rate-cut language removed from the policy statement.
  • Markets now price a higher chance of a September hike than a hold, with bets on rates staying unchanged by year-end falling to 13% from 40% on Tuesday.
  • Chair Warsh pledged to deliver price stability, announced a wide-ranging policy review, and broke with tradition by not submitting a rate-path projection.
  • All 11 S&P 500 sectors closed lower after the meeting, with communications services leading declines at 3% loss and industrials the least affected, down by only 0.1%.
  • Regional banks underperformed, with the KBW Regional Banking Index down 1.8%, while the homebuilders ETF fell 2.3% amid higher-rate concerns.
  • SpaceX fell 4.9% in its first decline since its market debut, while CME Group slipped 3.5% after CEO Terry Duffy announced his departure.
  • Trump said the Iran deal was not final, and the war could resume if he is unsatisfied, nudging oil prices back up after recent sharp declines.
  • Allbirds soared 39% after rebranding Smartbird and appointing a former Amazon executive as CEO.

• US Treasury yields steady at 4.46% as Fed flags possible rate hike this year
  • The 10-year yield erased earlier losses to hold at 4.46% after the Fed held rates and signalled potential tightening ahead.
  • Nearly half of FOMC members projected at least one rate hike this year, with core inflation revised higher and unemployment expectations lowered.
  • The hawkish pivot followed data pointing to higher underlying price growth stemming from the West Asia war's impact on energy prices, even as the labour market remained robust.
  • Chair Warsh declined to submit his own rate projections, while also calling for a smaller Fed balance sheet with a focus on reducing longer-term Treasury holdings.

• Dollar jumps to its highest since March as hawkish Fed projections surprise markets
  • The dollar index rose above 100.3, its highest since March, after the Fed's projections were interpreted as more hawkish than expected.
  • Roughly half of FOMC members projected at least one rate hike this year, with traders now fully pricing in a 25bps hike by year-end.
  • The Fed sharply revised up its 2026 PCE inflation forecast to 3.6% from 2.7%, with core PCE now seen at 3.3%, up from 2.7% previously.
  • Chair Warsh announced five task forces to review Fed communications, its balance sheet, and other key policy areas.
  • The dollar posted its largest gains against the British pound and the euro.

• Oil gains nearly 1% as Trump casts doubt on Iran deal finality
  • Brent settled at $79.55 per barrel, up by 0.75%, and WTI at $76.79 risen by 0.97% after Trump said the Iran MOU was not final and a bombing campaign could resume if he is unsatisfied.
  • Fresh Israeli airstrikes and Hezbollah drone attacks in southern Lebanon added to the ceasefire uncertainty.
  • US crude inventories fell for a tenth straight week, pushing total stockpiles to their lowest level since 1985 as the war in Iran continued to upend global energy markets.
  • The IEA warned of a significant 2027 supply overhang, with global supply set to surge 8 million bpd against demand growth of just 2 million bpd.
  • In the near term, the IEA said the Iran-US deal provides an opportunity to replenish depleted inventories and rebuild strategic reserves.
  • A full return to pre-war production and refining levels is still expected to take weeks, months, or even years, industry officials say. 

Day’s Ledger*

Economic Data

• UK April Unemployment Data
  
• US Weekly Jobless Claims Data   

Corporate Actions

• State Bank of India board to consider fund raising options
  
• 5Paisa Capital board to consider fund raising options        

Policy

• German Buba President Nagel Speaks
  
• ECB's Elderson Speaks
  
• Bank of England Interest Rate Decision 

Tickers to Watch

• APOLLO HOSPITALS ENTERPRISES settled an RBI matter after paying a compounding amount of ₹0.18 billion, leading to termination of proceedings.
• BOSCH HOME COMFORT INDIA promoter Bosch Global Software Technologies to sell up to a 7.97% stake via OFS at a floor price of ₹1,150 per share, with a 0.75% greenshoe option.
• CORONA REMEDIES saw Sepia Investments and Anchor Partners sell a 7.3% stake worth ₹7.77 billion, while HDFC Mutual Fund acquired shares worth ₹4.24 billion alongside other institutional investors.
• DOMS INDUSTRIES witnessed block deals as SBI Mutual Fund bought shares worth ₹2.05 billion and Axis Mutual Fund purchased ₹0.80 billion, while FILA Fabbrica Italiana sold a 7% stake worth ₹9.35 billion.
• HFCL secured a BharatNet Phase-III project order worth ₹26.66 billion from RVNL in Uttar Pradesh.
• LUPIN launched Azilsartan Medoxomil tablets in the US for the treatment of hypertension, expanding its cardiovascular portfolio.
• RAILTEL CORPORATION OF INDIA received a LoI worth ₹0.53 billion (including tax) for development of disaster recovery IT infrastructure and five-year maintenance.
• RVNL secured an EPC order worth ₹9.68 billion from East Coast Railway.

Must Read

• The Fed Has Been Honest and Stupid
• Could Indonesia’s Sovereign Fund Show India a Better Way?
• When Vedanta Meets Wall Street’s Trillion-Dollar Valuations
• What Did The Green Revolution in India Do To Farm Size-Productivity Relationship?
• Silver Imports Plunge After Duty Hike and Import Restrictions: GTRI
• Chairman Warsh abstains from giving rate forecast as several members signal a hike in 2026
  
• Trump says he likes idea of blaming Vance if Iran deal doesn’t work out
• Anthropic curbs ignite AI debate in India — efforts ‘too slow, way too small’ 
  

See you tomorrow with another edition of The Morning Edge.

Have a great trading day

Credit Surge Tests Banks’ Liquidity Defences and ALM Discipline

India's banking system is lending faster than it is gathering deposits.

For now, liquidity remains comfortable. 

kembai Srinivasa Rao writes, but beneath the surface, rising CD issuance, margin pressure, and a growing pool of undrawn credit commitments are creating new challenges for banks.

As credit demand continues to surge, are banks being tested not on growth, but on how well they manage the liabilities that fund it?

(*Compiled from various media sources)