Asian Stocks Slip as Fed, Middle East Jitters Persist

• Asian stocks slip amid mixed market sentiment.
• Middle East tensions keep oil supported.
• Rate-hike bets boost dollar, pressure yen.
• AI valuation concerns weigh on tech.

Asian stocks traded lower on Monday, with regional benchmark indexes declining as investors weighed uncertainty over the Middle East ceasefire against growing expectations that the U.S. Federal Reserve could raise interest rates later this year. Oil prices edged higher, the U.S. dollar hovered near a one-year high and technology stocks remained under pressure over valuation concerns.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.4%, while Japan’s Nikkei declined 1% and South Korea’s KOSPI dropped nearly 2%. U.S. futures were more resilient, with S&P 500 and Nasdaq futures each gaining 0.4%, while European futures rose 0.2%.

Middle East Tensions Keep Oil Markets on Edge

Investor sentiment remained cautious despite the United States and Iran agreeing to halt renewed hostilities after several days of exchanges that threatened an interim peace agreement and raised concerns over shipping through the Strait of Hormuz.

Brent crude rose 0.85% to $72.60 a barrel, while U.S. West Texas Intermediate crude climbed more than 1% to $70.01. Oil has surrendered most of the gains triggered by the conflict, but uncertainty over the durability of the ceasefire continues to support prices.

“Markets enter July with a ceasefire that nobody quite trusts,” said Marc Chandler, chief market strategist at Bannockburn Capital Markets.

Fed Rate Expectations Lift the Dollar

Markets have sharply revised expectations for U.S. monetary policy. Before the Middle East conflict, investors expected the Federal Reserve to cut interest rates twice in 2026. They are now pricing in at least one rate hike, while Bank of America expects three increases, citing persistent inflation, a resilient labor market and expectations under new Fed Chair Kevin Warsh.

“It feels like we are lacking a bit of direction,” said Nick Twidale, chief market strategist ​at ATFX Global in Sydney. “We may get a shot in the arm later today from more positive news out of ⁠the Middle East… but at the moment I think it’s going to be a bit of a flow-driven day without major moves to either side,” ​Twidale told Reuters.

The shift has pushed the U.S. Dollar Index to 101.33, just below a one-year high reached last week.

The stronger dollar kept the Japanese yen near 161.77 per dollar, close to levels that previously prompted intervention by Japanese authorities. Gold fell 0.4% to $4,072 an ounce and is on track for a 13% decline in the second quarter, its steepest quarterly drop since 2013.

Investors Rotate Away From Big Tech

Technology stocks remained under pressure as investors reassessed elevated valuations following years of AI-driven gains. While Micron’s upbeat earnings outlook highlighted continued demand for artificial intelligence infrastructure, rising investment costs and concerns about future returns have prompted investors to diversify into more defensive sectors.

Strategists at Bank of America said markets are showing early signs of rotating away from mega-cap AI stocks toward smaller, more cyclical companies. Separately, the Bank for International Settlements warned that supply constraints and intense competition could lead to over-investment similar to previous technology boom-and-bust cycles.

Interactive Brokers senior economist Jose Torres told Reuters that “companies are increasingly drawing on cash reserves to fund AI infrastructure, encouraging investors to favor sectors” with more “predictable earnings while they assess whether those investments generate sustainable returns”.

With investors balancing geopolitical risks, higher oil prices and a more hawkish Federal Reserve outlook, markets are likely to remain driven by incoming economic data and developments in the Middle East in the weeks ahead.

(With inputs from agencies)