Asia stocks rebound as Iran fears ease, but traders stay on alert

Equities rebounded while oil and safe-haven gold retreated Tuesday as fears of a Middle East conflict abated for now, but investors remained on alert for any escalation after the US assassination of a top Iranian general.

With few major developments in the crisis fuelled by the killing of Qasem Soleimani last week, traders were able to turn their attention back to the global economic outlook and the US-China trade deal signing planned for January 15.

Wall Street provided a positive lead, with all three main indexes reversing early losses to end in the green as traders welcomed strong service sector data from the US, Europe and Britain that provided hope that the worldwide growth slowdown was easing.

Asian markets were broadly higher, with Tokyo ending 1.6 per cent up, Hong Kong adding 0.3 per cent and Shanghai rising 0.7 per cent.

Sydney climbed more than one per cent, while Seoul jumped one per cent and Singapore put on 0.7 per cent. Manila, Mumbai and Bangkok were also up, while Wellington was marginally higher and Taipei eased slightly.

In early trade London rose 0.1 per cent, Paris gained 0.4 per cent and Frankfurt climbed 0.6 per cent.

Observers said the limited impact on markets was mostly because the standoff was not expected to have a massive impact on global growth.

The shift back to riskier assets saw oil prices retreat, having rallied almost seven per cent in the previous two days. Gold slipped from six-and-a-half-year highs.

"Putting to one side the heat and noise of the events of the last few days, and in the absence of further violence and escalations, the reality is that very little has changed," said CMC Market analyst Michael Hewson in a note.

But analysts warned that the mood could change in a split second, with Donald Trump warning of a "major retaliation" if Iran carries out any revenge attacks.

"It's wait-and-see mode here," said Steve Chiavarone, at Federated Investors.

"How much, if at all, do things escalate with Iran and does it ultimately impact the global economic outlook? Right now, not so much. Could it change? Sure."
Tapas Strickland, at National Australia Bank, added: "The potential for this to spiral into a cycle of retaliation remains and markets will likely remain cautious."
"But it's the great unknowns around what form of retaliation will transpire and the unlikelihood of de-escalation that should continue to support the higher risk premiums over the medium term."