Stock markets in Japan and South Korea have simultaneously reached new all-time highs, with the Nikkei 225 surpassing 71,000 points for the first time and the Kospi approaching the 9,000 level. Concurrently, the Japanese yen has weakened to its lowest point in nearly two years, heightening concerns about potential intervention. The Federal Reserve's hawkish dot plot has signaled a potential interest rate hike within the year, causing the 2-year U.S. Treasury yield to surge by 13 basis points in a single day. However, a U.S.-Iran agreement to reopen the Strait of Hormuz has put pressure on oil prices and cooled inflation expectations.
In early Thursday trading, Japanese and South Korean equities set new records, while the yen depreciated to its weakest level since July 2024. Markets across the Asia-Pacific region are navigating between the Federal Reserve's hawkish signals and the positive developments from the U.S.-Iran deal.
The Nikkei 225 index extended its intraday gains to 2%, breaking through the 71,000-point barrier for the first time in history to achieve a new record. The Korea Composite Stock Price Index (Kospi) also set a fresh all-time high.
A key factor in the improved market sentiment was the signing of an interim agreement with Iran by former President Trump, announcing the reopening of the Strait of Hormuz. Oil prices came under immediate pressure, with Brent crude falling over 1% to below $79 per barrel, easing market concerns about inflationary pressures.
Nevertheless, the Federal Reserve's signals regarding potential rate hikes continue to weigh on bond markets. The persistent weakness of the yen has sparked market attention on whether Japanese authorities might intervene.
Divergent Moves in Asia-Pacific Stocks, Tech-Heavy Shares Lead Gains
In equity markets, Japanese and South Korean indices stood out. The Nikkei 225 index saw its intraday gain widen to 2%, historically closing above 71,000 points, while the Topix index rose 1.6%.
The Kospi gained 0.89%, reaching an intraday high of 8,975.52 points, nearing the 9,000-point milestone. Major constituent SK Hynix surged 3.45% to another record high, and Samsung Electronics advanced 1.23%. The smaller-cap Kosdaq index fell 0.5%, underperforming the broader market.
Australia's S&P/ASX 200 index was largely flat. Hong Kong's Hang Seng Index futures were quoted at 24,200 points, below the previous closing level.
In U.S. markets, following the conclusion of the Federal Reserve's meeting on Wednesday, the three major indices all closed lower. The Dow Jones Industrial Average fell 507.12 points, or 0.98%. The S&P 500 index declined 1.21%, and the Nasdaq Composite dropped 1.34%. The Dow had earlier hit an intraday record high during the session but subsequently gave up all gains due to the Fed's hawkish signals.
However, U.S. stock futures later rebounded, with S&P 500 futures up 0.8% and Nasdaq futures gaining over 1%, following the previous day's declines of more than 1% prompted by the Fed's hawkish stance. Spot gold also rebounded, rising to touch $4,300 per ounce, up approximately 1% on the day.
Yen Weakens to Near Two-Year Low, Intervention Concerns Mount
The yen depreciated against the U.S. dollar to 160.7, its lowest level since July 2024, intensifying concerns that Japanese authorities might intervene in the currency market.
Bank of Japan Deputy Governor Uchida stated that exchange rates are crucial to the economic outlook but are not a direct policy target. Investors reacted coolly to these remarks, with widespread market concern that the pace of the Bank of Japan's policy tightening may be insufficient to effectively curb inflation and stabilize the yen—despite the central bank having raised its benchmark interest rate to its highest level since 1995 earlier this week.
The yield on Japan's 10-year government bond rose 2.5 basis points to 2.620%, following the sell-off in U.S. Treasuries. The yield on Australia's 10-year bond also increased by 3 basis points to 4.80%.
Fed Adopts Hawkish Turn, Dot Plot Suggests Rate Hike This Year
The Federal Reserve concluded its policy meeting on Wednesday, leaving the benchmark interest rate unchanged in the range of 3.5% to 3.75%. However, the latest "dot plot" revealed that several officials anticipate an interest rate increase within 2026. The median forecast for the year-end rate was raised from 3.4% in March to 3.8%, suggesting that at least one rate hike this year is now in view.
This was the first policy meeting chaired by Fed Chair Kevin Warsh. In a press conference, Warsh emphasized that inflation has remained above the Fed's 2% target for several consecutive years and reiterated the central bank's commitment to restoring price stability, but declined to provide specific guidance on the next policy steps. Notably, Warsh himself chose not to submit an interest rate forecast, adding uncertainty to the interpretation of the dot plot.
Approximately half of the Federal Open Market Committee (FOMC) members anticipate a rate hike this year. Traders have fully priced in an October rate increase and consider a move in September to be a significant probability. The 2-year U.S. Treasury yield, highly sensitive to policy expectations, jumped 13 basis points to 4.18% on Wednesday.
"Half the committee expecting a hike this year is a real wake-up call for the market," said Bob Michele, Chief Investment Officer and Head of Global Fixed Income at J.P. Morgan Asset Management. "I think they are preparing to hike."
U.S.-Iran Deal Boosts Risk Sentiment, Oil Prices Extend Declines
Former President Trump signed a memorandum of understanding with Iran at the Palace of Versailles in France on Wednesday, announcing an end to the war and the reopening of the Strait of Hormuz. A U.S. official stated that the agreement is formally in effect, but it remains unclear whether Iran has taken immediate measures to fully reopen the strait.
"Trump signing the MOU after the G7 meeting is another important step in the process of reopening the Strait of Hormuz," said Rajeev De Mello, a Global Macro Portfolio Manager at Gama Asset Management. "This will further compress energy risk premiums, ease inflation concerns, and provide support for bond and equity markets following the initial Fed reaction."
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