An Asian equity gauge jumped by the most in six weeks as benchmark indexes edged higher. Japanese stocks outperformed the region with gains of more than 2%. US stock futures also edged higher after the S&P 500 advanced 0.6% on Monday. The moves come with investors still evaluating the potential impact of the Israel-Hamas conflict.

Treasuries jumped, with yields on the benchmark 10-year dropping more than 16 basis points to 4.63% Tuesday. The yield on the policy-sensitive two-year note slipped by almost 16 basis points as investors boosted bets the Fed will keep interest rates unchanged through the end of 2023. Yields on Australian and New Zealand bonds also declined.

Fed vice chair Philip Jefferson said officials could “proceed carefully” following the recent rise in Treasury yields, and Fed Bank of Dallas president Lorie Logan said the surge in long-term rates may mean less need for further tightening. 

“Stocks are likely to be supported on the softening tone over tightening in the US and Europe,” said Hideyuki Ishiguro, senior strategist at Nomura Asset Management. “The fact that the market has not been panicking over fighting between Hamas and Israel comes as a relief for investors.”

At the end of last week, traders had boosted bets on another Fed hike this year as data showed US employment unexpectedly surged in September. That narrative switched on Monday as central bank officials tamped down speculation of another rate increase in 2023.

The dollar steadied after an earlier advance as odds for another Fed tightening eased. The offshore yuan advanced.

The tensions in the Middle East, however, may escalate further after the Financial Times reported a top US general warned Iran to “not get involved” in the Israel-Hamas conflict. 

Meanwhile, oil retreated in Asia. Crude had jumped by the most in six months Monday following Hamas’ attack. Gold extended its climb into a third day. 

Tough times

The latest Middle East conflict comes at a time of ongoing geopolitical concerns, with markets also facing a period of moderating global economic growth, according to Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management.

“Against this backdrop, we continue to prefer fixed income to equities,” Marcelli said. “We see a better risk-reward profile for fixed income, and we recommend investors consider buying high-quality bonds in the five- to 10-year maturity range. We foresee further cooling in inflation and slower global growth.”

The next risk to US stocks could come from fiscal policy constraints at a time when the Fed is still fighting high inflation, according to Morgan Stanley’s Michael Wilson. The strategist — among the most prominent bearish voices on Wall Street — said while the US government narrowly avoided a shutdown last week, “the lack of a resilient long-term structure that supports fiscal discipline” could have an impact on financial markets.