MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.28%, heading for a 2.7% weekly gain, its strongest performance since mid-June

Asian stocks rose on Friday, poised for their strongest week in two months as benign inflation data dented expectations of ​an imminent U.S. rate hike, although faltering talks to end the war in the Middle East are likely to keep risk sentiment in check.

Brent futures steadied at $87.03 per barrel after a drop on Thursday but were set for a 4% weekly gain, snapping a two-week losing streak, after the U.S. threatened to ramp up economic pressure on Iran, including extending a naval blockade.

Markets have so far shrugged off the lack of progress in ending the Iran war, instead focusing on ​the broad AI theme and the international monetary policy outlook.

Charu Chanana, chief investment strategist at Saxo, said ⁠risk appetite can hold for now because the immediate Fed hike risk has been repriced lower, noting softer oil is also helping.

But this is still ​a headline-driven rally rather than a clean risk-on regime, said Chanana. Without clarity on the Middle East/Hormuz, another oil spike could quickly revive inflation and Fed ​concerns.

MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.28%, heading for a 2.7% weekly gain, its strongest performance since mid-June. Nikkei was 1.5% higher, set for an over 5% gain for the week.

A puzzling feature of markets in recent months has been the growing disconnect between geopolitical uncertainty and asset price volatility, ​said John Sidawi, senior portfolio manager for fixed income at Federated Hermes.

For now, markets appear willing to tolerate a significant amount of uncertainty without ​demanding higher risk premiums. However, this equilibrium is unlikely to be permanent, Sidawi said.

He said: A meaningful escalation in conflict or a clear path toward resolution could finally force investors ‌off the ⁠sidelines, potentially triggering a much larger volatility response than current market pricing implies.