Good morning,  

There is a lot happening at the moment, with the Israel-Iran conflict remaining at the forefront of markets.

Geopolitical disruption has intensified following Israel’s attack on Iranian territory last Friday, which sparked a wave of assaults from both sides. Beyond the tragic loss of life, one of the worst-case economic scenarios would involve Iran closing the Strait of Hormuz, a channel through which approximately 20% of global Oil shipments pass. This would lead to potentially severe consequences, forcing foreign partners to act and support some form of intervention. Global leaders are urging de-escalation, highlighting the need for restraint considering the threat that a widespread conflict between Israel and Iran poses to worldwide stability. 

Markets: Oil space in focus

In the markets, Oil prices have understandably been in focus as investors remain on edge. The price of Crude fell modestly yesterday amid reports of Iran seeking talks with Israel, raising hopes of a truce. However, attacks from both sides continue into a fifth day, and US President Donald Trump has advised residents to evacuate Tehran, along with several other nations that have also urged their nationals to leave the Iranian capital. It seems evident that, despite the possibility of a ceasefire, a resolution is not imminent.

Yesterday, major US equity indices finished the day higher across the board; the Dow rose by 0.8%, the S&P 500 rallied by 0.9%, and the Nasdaq 100 finished the day up 1.4%.

The US 20-year auction went off without a hitch; US yields bear steepened yesterday, with the benchmark 10-year yield rising four basis points and touching a high of 4.46%. The US Dollar Index ended the day unchanged, though it remains lower by nearly 1.5% this month. On that note, a chart I am watching closely right now is the monthly timeframe of the USD Index. As shown below, long-term price action failed to find much grip around support between 98.72 and 99.67, leading to a possible follow-through move towards channel support, extended from the low of 72.70.

Macro space today

Overnight, as widely expected by markets and economists, the Bank of Japan (BoJ) left its policy rate unchanged at 0.50% and offered us little in terms of surprise. The BoJ delivered a measured approach to unwinding its extensive bond-buying programme, planning to reduce its monthly bond purchases at a slower pace from the next fiscal year, decreasing them by ¥200 billion on a quarterly basis (currently ¥400 billion). Despite this slower pace, the central bank remains committed to normalising its monetary policy. The bank will continue its current pace of monthly bond purchase cuts until April next year, when the new, slower plan takes effect. This ongoing strategy indicates a determination to eventually reduce its substantial balance sheet.

The BoJ announcement comes a day before the US Federal Reserve (Fed) is scheduled to meet. Most will agree that a move on rates is highly unlikely, with focus largely on language and the ‘dots’, particularly for 2025. Overall, I expect a cautionary tone from the Fed’s language. For the most part, I also do not anticipate substantial changes to the Fed’s forecasts in their quarterly release, the Summary of Economic Projections (SEP). Nevertheless, it should not raise too many eyebrows to a slight upward (downward) revision to inflation (GDP [Gross Domestic Product]). 

While US economic data is demonstrating signs of softening, it is by no means ‘falling off a cliff’. Growth and inflation are currently in a reasonable position. Although GDP estimates indicate slowing economic activity, domestic demand remains stable, and the US remains at full employment, despite some layoffs. May CPI inflation also cooled, although it is forecast to rise in the coming months. Trade policy remains uncertain, as does the recent escalation between Israel and Iran, which may keep the Fed on hold until the latter part of the year. Markets are pricing in around two rate cuts this year (matching March’s SEP), targeting either the September or October meeting for the first 25-basis-point rate reduction. 

Today’s macro space will focus on US retail sales data out at 12:30 pm GMT. Between April and May, retail sales are forecast to have fallen by 0.7%, down from the meagre growth of 0.1% in the prior period (the estimate range is between 0.3% and a decline of -1.2%). The control group data is expected to rise by 0.3%, up from a decline of 0.2%.

Charts created using Trading View 

Written by FP Markets Chief Market Analyst Aaron Hill