Asian and Australian financial markets finished the week on a mixed note as investors confronted a combination of higher global interest rates, elevated oil prices, currency volatility and renewed expectations of tighter monetary policy.
The biggest developments for regional financial markets came from the US Federal Reserve and the Bank of Japan, while Australian investors remained focused on the possibility of further interest-rate increases from the Reserve Bank of Australia.
The S&P/ASX 200 ended Friday at 8,731 points, almost unchanged over the five trading days. The Australian market has nevertheless experienced considerable volatility in recent weeks, with the index falling in five of the past six weeks after reaching a record high in August. On Friday, materials stocks provided support, rising 1.5%, while utilities gained 0.7%. Energy was the weakest major sector, falling 1.2%.
The Australian dollar strengthened modestly during Friday trading, reaching about US71.3 cents. The currency benefited from expectations that Australia’s relatively high interest rates could remain in place for longer. RBA Governor Michele Bullock told a parliamentary committee that some of the upside risks to inflation identified by the central bank were beginning to materialise, reinforcing market expectations that monetary policy could remain restrictive.
Australian bond markets also reflected the higher-for-longer interest-rate environment. On Thursday, Australia’s three-year government bond yield was around 4.96%, while the 10-year yield was approximately 5.30%. Swap markets were also pricing elevated borrowing costs, highlighting the continuing sensitivity of Australian financial assets to inflation expectations.
Japan takes centre stage
Japan was one of the week’s most closely watched markets after the Bank of Japan raised its policy rate by 25 basis points to 1.25%, its highest level in 31 years. The decision was passed by a 7-2 vote, with two policymakers opposing the increase.
The reaction of the yen was particularly notable. Rather than strengthening on the rate increase, the currency weakened sharply against the US dollar. The dollar reached around ¥158, as investors interpreted the split vote and the BOJ’s guidance as providing limited certainty about the pace of future increases. Japanese authorities also reportedly conducted rate checks, adding to speculation about possible intervention in the foreign-exchange market.
Japanese equities nevertheless rallied. The Nikkei 225 rose 1.38% on Friday to 65,018, while financial stocks benefited from expectations that higher interest rates could improve banks’ lending margins.
China and Hong Kong
Chinese equities recovered strongly on Friday after a weaker start to the week. The Shanghai Composite gained 0.94% to 3,911, while the CSI 300 rose 1.06%. Shenzhen’s main index gained 1.72%, with technology, semiconductor and artificial-intelligence stocks among the stronger performers.
Despite Friday’s rally, the weekly picture was more subdued. The Shanghai Composite gained about 0.6% for the week, while the CSI 300 was broadly unchanged. The Hang Seng Index in Hong Kong fell about 0.2% over the week, although it gained 0.6% on Friday to finish at 24,750. The Hang Seng Tech Index rose 2.2% on Friday.
Investor attention increasingly turned towards the expected meeting between US President Donald Trump and Chinese President Xi Jinping. Markets are watching for progress on trade and other economic issues, with the possibility of reduced commercial tensions providing some support to Chinese shares.
Korea and Taiwan
South Korean and Taiwanese equities performed strongly at the end of the week. The KOSPI rose 2.66% on Friday to 6,894, while Taiwan’s TAIEX gained 1.93% to 47,180. Technology and semiconductor companies remained important drivers of regional market sentiment, although investors continued to assess the effect of higher US interest rates on expensive technology stocks.
Global rates and commodities
The dominant global financial-market event was the US Federal Reserve’s 25-basis-point interest-rate increase, taking its benchmark rate to 3.75%-4.00%. The Fed also indicated that additional tightening could be required, with 16 of its 18 policymakers projecting at least one more quarter-point increase before the end of 2026.
Higher US rates supported the dollar and placed pressure on some Asian currencies and commodity markets. Oil remained above US$100 a barrel, although Brent crude retreated towards US$103-$104 by Friday as concerns over supply disruptions eased. Gold remained elevated at more than US$4,300 an ounce.
Copper was another important commodity for Australia and Asia. Three-month copper was on course for a weekly gain of roughly 1.6%, supported by stronger physical demand in China despite uncertainty over potential US tariffs on refined copper.
Overall, the week highlighted the increasingly complex environment facing Asian markets. Equity markets remained resilient despite higher interest rates, but the combination of inflation, oil prices, currency volatility and divergent central-bank policies continued to create uncertainty. For Australian investors, the RBA’s warnings about inflation and the possibility of further rate increases remained particularly important, while developments in China, Japan and global commodity markets continued to provide the main external influences on the local market.
