Asian markets began the week with a rare pocket of calm.
Investors who had spent days watching the Strait of Hormuz, oil screens and central-bank signals found enough comfort in fresh US-Iran diplomacy to buy risk again, even if the relief looked fragile.
Iranian negotiators said the first round of talks had made progress, while mediators from Qatar and Pakistan pointed to a 60-day path towards a final agreement.
That softened fears that last week’s interim peace process was unravelling after fresh threats from Washington and Tehran’s renewed move to restrict traffic through Hormuz.
Diplomacy cools the oil scare
The reaction was clearest in crude. Brent surrendered early strength and traded near $80 a barrel, well below its May spike above $126, while US crude held firmer around $77.50.
Shipping flows through Hormuz remained thinner than normal, keeping traders wary, but the prospect of continued talks reduced the immediate risk premium.
Equities responded quickly. Japan’s Nikkei rose 1.9%, extending a powerful run that had already lifted the benchmark to record territory.
South Korea’s Kospi added 2.6%, helped by another rush into semiconductor names as investors chased companies tied to AI infrastructure demand.
The MSCI Asia-Pacific index outside Japan gained about 1%, while Chinese blue chips struggled for direction.
Wall Street futures were less enthusiastic. S&P 500 contracts slipped 0.2% and Nasdaq futures lost 0.3%, suggesting investors were not ready to declare the geopolitical risk over.
European futures were also mixed, with the Euro Stoxx 50 marginally lower and the FTSE showing a small gain.
Fed repricing limits the relief rally
The larger brake on sentiment came from the Federal Reserve.
Last week’s policy meeting left markets pricing a much higher chance of a rate increase by September, with futures implying roughly 38 basis points of tightening by year-end.
Two-year Treasury yields briefly rose to 4.2276%, their highest level since early 2025, as investors adjusted to a more hawkish Fed message.
The central bank’s preferred core inflation gauge, due this week, is expected to edge higher in May, reinforcing the idea that policymakers have little room to relax.
JPMorgan strategists have argued that the Fed can afford patience, but the margin for further inflation surprises is narrowing.
They still see support for quality growth, large-cap and technology stocks, where earnings visibility remains stronger.
Dollar strength adds another fault line
Higher US yields kept the dollar firm at about 161.5 yen, close to levels that could invite concern from Japanese authorities.
The euro hovered near $1.146, after touching a three-month low last week.
Sterling also softened as UK political uncertainty returned to the market’s radar.
NAB analysts cautioned that questions over Prime Minister Keir Starmer’s position could keep gilts under pressure.
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