Asian equity markets, including India, ended the week on a cautious note, with most major indices closing lower as investors reduced risk ahead of the closely watched US employment report. Market sentiment was also affected by higher crude oil prices and ongoing geopolitical tensions in the Middle East, prompting investors to move toward defensive positions.
Japan's market finished lower as technology and export-oriented stocks came under pressure amid uncertainty over the outlook for US interest rates. South Korean equities also declined, reflecting weakness in semiconductor and manufacturing shares. Chinese mainland markets traded with mixed performance, while Hong Kong outperformed the region, supported by gains in large technology and financial companies.
Indian equity markets ended Friday in negative territory after a volatile trading session. The benchmark indices-- BSE Sensex closed at 78,499.17, down 0.58% or 455 points, and NSE Nifty 50 ended at 24,570.65, down 0.27%.
The decline was driven primarily by profit-taking in financial stocks and cautious investor positioning ahead of the US payrolls report. Rising crude oil prices also weighed on sentiment, as higher energy costs could increase inflationary pressures for an oil-importing economy like India.
Despite Friday's weakness, Indian markets remained relatively resilient over the course of the week, supported by continued domestic institutional buying, steady corporate earnings, and optimism surrounding India's medium-term economic growth outlook.
"Financials mainly bore the brunt of the decline after the Reserve Bank of India's draft proposal to tighten lending norms for non-banking financial companies (NBFCs) raised concerns over the sector's long-term growth prospects," said Hariselvan Radhakrishnan, Founder & CEO of HST Wealth, a research analyst firm.
Key drivers across Asian markets
While several factors influenced trading across the region, the key resons included investors' risk averse avoiding significant new positions before the release of the US employment data, which is expected to shape expectations for future Federal Reserve interest-rate decisions.
Higher oil prices, ongoing geopolitical tensions and currency movements also influnced the markets significantly on Friday. The high oil prices raised concerns about inflation and increased costs for businesses and consumers.
Ongoing geopolitical tensions encouraged investors to shift toward safer assets, limiting gains in equity markets. And, currency movements and expectations for global monetary policy also contributed to cautious trading activity.
What is expected from the US markets
US equity markets are expected to open cautiously, with trading likely to be driven by the July Non-Farm Payrolls report.
A stronger-than-expected employment report would indicate continued resilience in the US economy but could reinforce expectations that the Federal Reserve will maintain higher interest rates for longer. While this would be viewed positively for economic growth, it could place pressure on technology and other growth-oriented stocks.
Conversely, a weaker employment report could strengthen expectations for future interest-rate cuts. Lower rate expectations generally provide support for equities, particularly technology, communication services, and other sectors that benefit from a lower cost of capital.
Investors will also monitor wage growth and the unemployment rate for additional insight into inflation trends and the broader health of the US labour market.
Unless the US employment report delivers a significant surprise, markets are likely to continue trading within recent ranges. Any notable deviation from expectations, however, could increase volatility across global equity, bond, and currency markets as investors reassess the outlook for interest rates and economic growth, say a couple of analyst reports.
