Asian stocks rose on Friday, poised for their strongest week in two months as benign inflation data dented expectations of an imminent U.S. rate hike, although faltering talks to end the war in the Middle East are likely to keep risk sentiment in check.
Brent futures steadied at $87.03 per barrel after a drop on Thursday but were set for a 4% weekly gain, snapping a two-week losing streak, after the U.S. threatened to ramp up economic pressure on Iran, including extending a naval blockade.
Markets have so far shrugged off the lack of progress in ending the Iran war, instead focusing on the broad AI theme in the wake of strong earnings that placated investors' worries about massive AI spending.
European stock futures indicated a higher open, while Nasdaq futures dipped 0.1%.
U.S. inflation reports this week suggested pricing pressure remained under control, lowering the odds of a rate increase from the Federal Reserve next month.
Charu Chanana, chief investment strategist at Saxo, said risk appetite can hold for now because the immediate Fed hike risk has been repriced lower, noting softer oil is also helping.
"But this is still a headline-driven rally rather than a clean risk-on regime," said Chanana. "Without clarity on the Middle East/Hormuz, another oil spike could quickly revive inflation and Fed concerns."
In stocks, MSCI's broadest index of Asia-Pacific shares outside Japan (.MISX00000PUS) rose 0.16%, heading for a 2.6% weekly gain, its strongest performance since mid-June. Japan's Nikkei (.N225) was 1.5% higher.
South Korea's KOSPI (.KS11), a barometer for investor sentiment on the AI trade, rose 1.8%, on course to snap a seven-week losing streak with gains of nearly 11%.
John Sidawi, senior portfolio manager for fixed income at Federated Hermes, said a puzzling feature of markets in recent months has been the growing disconnect between geopolitical uncertainty and asset price volatility.
"For now, markets appear willing to tolerate a significant amount of uncertainty without demanding higher risk premiums. However, this equilibrium is unlikely to be permanent," Sidawi said.
"A meaningful escalation in conflict or a clear path toward resolution could finally force investors off the sidelines, potentially triggering a much larger volatility response than current market pricing implies."
YEN STUCK IN INTERVENTION LOOP
The yen was at 159.36 per U.S. dollar, hovering close to the crucial 160 level that traders believe could trigger another bout of yen buying from Tokyo, after a joint intervention with the U.S. last month failed to steady the frail currency.
Padhraic Garvey, head of global rates and debt strategy at ING, said the yen's weakness comes from "an uber-cautious Bank of Japan and a policy rate that remains too low," noting the yen is back testing 160 levels as the underlying issues remain.
"This tension can be eased through rate hikes, and the sooner, the better," said Garvey. "While that could be construed as negative for the economy, it's also a choice. Prioritise the protection of the yen, or not?"
In commodities, gold was down 0.6% at $4,325 per ounce, as traders locked in profits after the yellow metal hit its highest level since early June in the previous session, due to dimming expectations of a near-term hike.
Traders are now pricing in a 35% chance of the Fed hiking next month, compared with 55% a week earlier, CME FedWatch tool showed.
