• Chinese stock market surged, driven by Beijing's aggressive stimulus measures, while Hong Kong's market saw a decline.
• Investors are awaiting further details about China's stimulus pledges from the National Development and Reform Commission.
• Market volatility is heightened due to fears of a widening conflict in the Middle East and potential disruption to oil supplies.
• Investors are reassessing the outlook for the Fed's easing cycle after Friday's U.S. jobs report, with expectations of a less-aggressive easing cycle.

The mainland Chinese stock market made a roaring comeback on Tuesday after an extended break, reaching multi-year highs. This surge was driven by investor enthusiasm over Beijing's aggressive stimulus measures, which showed no signs of abating. However, this optimism did not extend to other Asian share markets, particularly Hong Kong, which reversed some of the gains it had made while China was on a week-long holiday.

China's CSI300 blue-chip index surged 10% in early trade, reaching its highest level since July 2022. Similarly, the Shanghai Composite Index jumped about the same amount, marking its highest point since December 2021. In contrast, Hong Kong's Hang Seng Index tumbled 3.9%, with the Hang Seng Mainland Properties Index sliding more than 7%. This led to a more than 1% drop in MSCI's broadest index of Asia-Pacific shares outside Japan.

Gary Ng, a senior economist at Natixis, provided insight into the market movement. He stated, I think the movement today basically just explains that in the Chinese onshore market, it's just rising to a level that investors are comfortable with. And in Hong Kong, there may be a bit of a profit taking or breaking even move.

Global Market Reactions and Middle East Conflict

Investors are now closely watching a press conference by China's National Development and Reform Commission, the country's national economic and social planning agency, for further details about the stimulus pledges which had also sparked a rally in Chinese stocks before the holidays. Elsewhere, Tokyo's Nikkei fell more than 1%. S&P 500 and Nasdaq futures were steady.

Adding to the market volatility, fears of a widening conflict in the Middle East sapped bullish sentiment after Hezbollah on Monday fired rockets at Israel's third-largest city, Haifa, and Israel looked poised to expand its offensive into Lebanon, one year after the devastating Hamas attack on Israel that sparked the Gaza war. Worries such a conflict would disrupt oil supplies sent Brent crude futures on Monday surging above $80 a barrel for the first time in over a month, although they pared some gains on Tuesday in Asia.

Analysts at ANZ said concerns Israel might target Iran's oil infrastructure had fueled the rally and that comments from U.S. President Joe Biden hadn't eased the fears. They stated, We still think a direct attack on Iran's oil facilities is the least likely of Israel's retaliation options.

Fed's Interest Rate Policy and Market Reactions

In the broader market, investors were reassessing the outlook for the path of the Fed's easing cycle after Friday's blockbuster U.S. jobs report. Any chance of another 50-basis-point rate cut in the near future has been erased and traders are pricing in a 12% chance the Fed could keep rates on hold at its next meeting, with just 50 basis points of cuts expected by December. Expectations of a less-aggressive easing cycle than previously anticipated kept the benchmark US Treasury yield above 4% in Asia trade.

Vishnu Varathan, head of macro research for Asia ex-Japan at Mizuho Bank, commented on the Fed's rate cut cycle, stating, While confidence about another 50-bp cut is justifiably dampened... the Fed rate cut cycle is far from derailed. He further added, Admittedly, the all-around blockbuster jobs report is justifiable cause to reassess overzealous 'pivot bets' on front-loaded, outsized cuts.

Despite the revised Fed expectations, the U.S. dollar failed to get a further lift, having already had a strong run last week, in part owing to safe-haven gains linked to Middle East news. The dollar was on the back foot in early Asia trade, falling 0.35% against the Japanese yen to 147.68, while sterling rose 0.07% to $1.3094. Against a basket of currencies, the greenback eased 0.1% to 102.38, though it hovered near a seven-week high hit on Friday.