Global markets navigating fiscal woes and geopolitical tensions

[WORLD] Asian equity markets saw modest gains on Wednesday, as investor sentiment remained cautious amid elevated bond yields and concerns over the fiscal health of major developed economies. The lack of significant progress on new trade agreements also kept risk appetite in check.

Oil prices climbed more than $1 a barrel following a CNN report indicating that Israel may be preparing to strike Iranian nuclear facilities. The news reignited concerns about potential supply disruptions from the Middle East, a critical oil-producing region, and refocused attention on geopolitical risks.

Japanese bond markets remained under scrutiny after yields on ultra-long government bonds surged to record highs on Tuesday. The move followed a disappointing 20-year bond auction, raising doubts about demand for Japan's debt. In early Wednesday trading, yields on 20-year bonds inched up by 2 basis points, while 30-year yields slipped 1.5 basis points.

In equity markets, China's blue-chip index showed little movement, while Hong Kong's Hang Seng Index advanced 0.58%. Beijing issued a warning that it may pursue legal action against individuals or entities complying with U.S. guidelines discouraging the use of Chinese advanced semiconductors, underlining ongoing Sino-U.S. trade tensions.

The MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.5%, while Japan’s Nikkei slipped 0.18%. “The markets are craving fresh catalysts to boost risk appetite,” said Kyle Rodda, senior financial market analyst at Capital.com. “The U.S.'s sudden reversal on trade policy, along with its efforts to contain the fallout from the Liberation Day tariffs, signals a determination to see things through. That resolve is helping support equity valuations.”

New data released Wednesday showed Japanese exports rose for a seventh consecutive month in April, but shipments to the U.S. declined, highlighting the potential toll of former President Donald Trump's tariff measures on Japan’s fragile economic rebound.

Fiscal anxieties were also evident on Wall Street, where the S&P 500 snapped a six-day winning streak on Tuesday, pressured by rising U.S. Treasury yields, which remained stable during Asian trading hours.

Investors are closely watching developments in Washington, where a proposed tax bill—potentially adding between $3 trillion to $5 trillion to the U.S. national debt—heads for a vote in Congress later this week. The bill, designed to fund large-scale infrastructure and social programs, comes shortly after Moody's downgraded the U.S. credit rating, highlighting concerns over debt sustainability. Analysts caution that the resulting debt burden could push interest rates higher, straining public finances and triggering spillover effects in global markets.

In the Middle East, geopolitical tensions flared once more. Reports of a potential Israeli strike on Iranian nuclear facilities have stirred fears of regional instability. Any military conflict could disrupt oil supplies from the region, driving up energy prices, adding to global inflation pressures, and further complicating economic recovery efforts.

Across Asia, the economic outlook remains uneven. While some economies are staging a recovery, others are still grappling with the lingering effects of the COVID-19 pandemic and escalating trade frictions. China’s potential legal pushback against U.S. semiconductor restrictions underscores the deepening rift between the world’s two largest economies—an issue with far-reaching implications for global technology supply chains.

Analysts suggest that progress on new trade agreements could help reinvigorate market sentiment, though many remain concerned that the damage from Trump's previous trade policies may already be baked into the global economic outlook.

Meanwhile, U.S. Federal Reserve officials on Tuesday signaled that higher consumer prices—driven in part by increased import tariffs—are on the horizon. They advised a cautious approach before making any changes to interest rates.

Traders also kept an eye on G7 finance ministers' meetings in Canada, amid speculation that U.S. officials may be advocating for a weaker dollar to bolster exports. In Europe, futures for the STOXX 50 were flat, while FTSE 100 futures remained subdued ahead of the U.K.'s April consumer inflation report, expected later in the day. Reuters-polled economists anticipate a 3.3% year-on-year rise in the consumer price index, up from 2.2% in March.

In currency markets, the dollar index edged down 0.03% to 99.938, following a 1.3% decline over the previous two sessions. The Japanese yen strengthened to 144.27 per dollar, nearing a two-week high.

Gold prices also gained as the dollar weakened, prompting a shift toward safe-haven assets. Spot gold rose 0.14% to $3,293 per ounce, marking its highest level in over a week.