A day without escalation in Middle East allows Asian stocks to bounce from disruption

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Updated: January 7, 2020 8:44:38 AM

Japan's Nikkei rallied 1.3% and Shanghai blue chips advanced 0.5%. E-Mini futures for the S&P 500 firmed 0.1%, while EUROSTOXX 50 futures rose 0.4%.

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Asian shares rebounded on Tuesday as a day passed without any new escalation in the Middle East and Wall Street erased early losses to end in the black as tech stocks climbed. Oil surrendered hefty gains as some speculated Iran would be unlikely to strike against the United States in a way that would disrupt supplies, and its own crude exports.
Brent crude futures fell 54 cents to $68.37 a barrel, having been as high as $70.74 on Monday, while U.S. crude dropped 44 cents to $62.83.

Gold also retreated to $1,557.54 an ounce, after scaling a near seven-year peak of $1,579.72 overnight. Equities went the other way as MSCI’s broadest index of Asia-Pacific shares outside Japan added 0.6%, recouping almost all of Monday’s losses.

Japan’s Nikkei rallied 1.3% and Shanghai blue chips advanced 0.5%. E-Mini futures for the S&P 500 firmed 0.1%, while EUROSTOXX 50 futures rose 0.4%. Shares had fallen sharply on Monday as Iran and the United States traded threats after an U.S. air strike killed a top Iranian commander. The mood calmed a little as the session passed with no new aggression.

Instead there was much confusion when the U.S, military wrote to Iraq on Monday saying it would pull out of the country, a letter seen by Reuters showed. Yet U.S. Defense Secretary Mark Esper told Pentagon reporters that no decision had been made and the military said the letter was only a poorly worded draft. Wall Street chose to hope for the best and the Dow rose 0.24%, while the S&P 500 gained 0.35% and the Nasdaq 0.56%.

Surveys of service sectors out overnight showed an improvement in the United States, UK and EU, stirring speculation the closely-watched ISM measure of U.S. services due later Tuesday will also show strength. “We think the longest U.S. expansion on record still has plenty of legs,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets. “To be sure, Iran adds an additional layer of complexity.”

“But while the risk of conflict has increased, the reality is this is likely to be limited to proxy skirmishes,” he argued. “The risk of a “hot” conflict seems low as Iran is unlikely to respond in such a way that risks a significant escalation from the United States.” The calmer mood saw the yen lose much of its safe-haven gains, with the dollar bouncing to 108.42 yen from a low of 107.75 hit on Monday.

The euro edged up to $1.1195, but faces stiff chart resistance around $1.1240, while sterling made gains to $1.3172 on better economic data at home. Against a basket of currencies, the dollar had drifted off to 97.645 but stayed above the recent six-month trough of 96.355.

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