US equity futures are modestly higher into Fed Day, bucking the trend of lower Asian and European markets, as the market shrugs off geopolitics after the US did not join Israel in bombing Iran and the dip buyers return. As of 8:15am, S&P futures are up 0.1% and Nasdaq 100 futs rise 0.2% even as global equities trade mostly in the red following the 6th day of strikes between Isreal/Iran. Pre-mkt, Mag7/Semis are outperforming; cyclicals poised for a strong day as Financials get a boost from de-reg after Bloomberg reported that regulators plan to reduce a key capital buffer for big lenders to ease constraints over trading in the Treasuries market. Sweden's Riksbank cut rates by 25bps (expected) while UK CPI was mostly in-line ahead of BoE rate decision tomorrow...FTSE flat/DAX -30bps/CAC -10bps/ Shanghai +4bps/Hang Seng -1.12%/Nikkei +90bps. Overnight, Trump called for Iran’s unconditional surrender/Iran said they will not accept an imposed peace or war and that they will respond “very seriously”/Iran said to be preparing missiles for possible retaliatory strikes on US Bases/worries about the straight of Hormuz where 20% of world seaborne-trade oil supply travels through daily/US announced a meeting on Weds with Pakistan’s army head to discuss mediation. Otherwise, all eyes on FOMC and the dotplot (economists expects them to remain on hold until further clarity about policy/tariff/economic outlook). Treasury yields are lower, the USD weaker, and commodities seeing profit-taking. While the Fed is the focal point of today’s macro data, keep an eye on initial claims and an update to the trend. TIC data at 4pm will show (lagged) foreign ownership of Treasuries. Focus is also on whether the US is planning to get directly involved in the Middle East conflict.
In premarket trading, Mag 7 are mostly higher alongside index futures (Tesla +0.3%, Meta +0.2%, Apple +0.2%, Amazon +0.2%, Nvidia +0.2%, Alphabet +0.2%, Microsoft -0.2%). Alcohol beverage stocks may move after Reuters reports that US Dietary Guidelines are expected to eliminate the long-standing recommendation that adults limit alcohol consumption to one or two drinks per day. Here are the other notable premarket movers:
Fed policymakers face heightened uncertainty as geopolitical tension adds to the inflation and labor market risks that are tied to the Trump administration’s trade policies. While tariffs haven’t so far accelerated price increases, consumers are turning anxious and household finances have worsened. Officials are widely expected to hold policy steady on Wednesday for a fourth straight meeting (see full preview here). Traders continue to wager on just shy of two quarter-point interest rate cuts this year, with the first move fully priced in for October. Fed officials penciled in two cuts for 2025 at their March projection.
“This is the meeting where the Fed will have fully incorporated tariffs into their forecasts,” Citigroup Inc. economist Andrew Hollenhorst told Bloomberg TV. “What they’re going to do with the dots is to leave them where they are. If you look at the inflation data that we have in hand, it’s a little bit hard be arguing that they need to get a lot more hawkish.”
Brent crude traded near $76.50 a barrel after rallying around 10% since Israel started its offensive against Iran last week. Markets are awaiting news on whether the US plans to become directly involved in the conflict, raising concerns about supply disruptions.
An overnight meeting between President Donald Trump and his national security team ensured tensions remain high, with speculation rife the US is close to joining Israel’s attacks. Iran’s Supreme Leader Ayatollah Ali Khamenei said that his country won’t surrender.
“Thus far we’ve seen the conflict in the Middle East having a relatively contained impact on markets,” Ursula Marchioni, BlackRock Inc.’s EMEA head of investments and portfolio solutions, told Bloomberg TV. If we were to see an escalation, “that is where you’ll start to see a transmission mechanism unlocking toward further inflationary pressure and potential impact on growth
Not helping sentiment was news that the European Union is refusing to hold an economic meeting with China due to a lack of progress on trade disputes. And speaking of Europe, the Stoxx 600 trades down -0.3% but off session lows, with health care and automobile shares leading declines, while utilities and real estate stocks are the biggest outperformers. Here are the biggest movers Wednesday:
Earlier in the session, Asian stocks struggled for direction as traders monitored the latest developments in the Middle East and awaited the Federal Reserve’s monetary-policy decision. The MSCI Asia Pacific Index was steady, with gains in Japanese and South Korean shares offset by losses in Hong Kong and India. Tencent and Alibaba were among the biggest drags on the benchmark, while Nintendo and TSMC advanced. Also hurting on sentiment was news that the European Union is refusing to hold an economic meeting with China due to a lack of progress on trade disputes. That’s adding to geopolitical worries and “raises fears of deeper decoupling beyond the US-China relationship, weighing on sentiment in Hong Kong given its close ties to mainland markets and sensitivity to global investor flows,” said Charu Chanana, a strategist at Saxo Capital Markets. Meanwhile, a closely-watched forum in Shanghai featuring China’s financial chiefs has so far yielded little positive surprise for investors.
In FX, the Bloomberg’s Dollar Spot Index dipped 0.1%; the Fed is expected to keep rates steady but traders have amassed a record futures bet that there will be a more dovish tilt right after Powell’s term ends in May 2026. GBP/USD rose as much as 0.4% to 1.3476; UK inflation remained at its highest level in over a year. USD/SEK rose as much as 0.3% to 9.5795, with Sweden’s krona leading G-10 losses against the dollar; The Riskbank cut its key rate and signaled potential for more easing.
In rates, treasury yields are slightly lower as US trading gets under way, supported by bigger gains for gilts following UK May inflation data. US session includes weekly jobless claims report, a day earlier than normal because of US holiday Thursday. US yields are 1bp-2bp lower on the day with curve spreads little changed. 10-year is near 4.375% with UK counterpart outperforming by 2bp and gilts leading gains for most European bond markets. Fed rate decision at 2pm New York time and Chair Powell news conference 30 minutes later. Ahead of Fed rate decision, swaps market prices in 44bp of easing by year-end; no move is expected today, however revised dot plot has potential to show a median forecast of just one cut this year, vs two in March projections (see full preview here).
In commodities, oil has been choppy and is now down. WTI drops 1.1% to around $74/barrel. Gold fluctuates as well, and is now down some $3 to $3,385/oz.
In crypto, bitcoin is on a weaker footing and slips below USD 105k; Ethereum also lower to a similar degree but manages to hold above USD 2.5k. US Senate had enough votes for stablecoin bill passage, according to Bloomberg.
The US economic data slate includes May housing starts/building permits and weekly jobless claims (8:30am) and April TIC flows (4pm).
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A more detailed look at global markets courtesy of Newsquawk
APAC stocks were mostly lower following the softer handover from Wall Street, with stocks in the US spooked by what seemed like an imminent US involvement in Israel's offensive against Iran. However, sentiment in APAC hours recovered as news surrounding US involvement quietened down overnight, with oil also coming off its best levels amid no signs of an American military attack. Ranges remained narrow ahead of the FOMC announcement. ASX 200 traded subdued with sectors overall mixed, but gold miners provided headwinds for the index. Nikkei 225 was modestly firmer and underpinned by recent losses in the JPY, while Japanese PM Ishiba agreed with US President Trump to continue ministerial-level tariff talks. Ishiba added that Japan would continue to work intensely to achieve a trade deal with the US. Hang Seng and Shanghai Comp traded lower but to varying degrees with underperformance in Hong Kong, although with limited news from the region, and attention focused on geopolitics.
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European bourses (STOXX 600 U/C) opened mixed on either side of the unchanged mark, before grinding ever so slightly higher as the morning progressed. More recently, however, indices have waned off best levels to now show a mixed picture in Europe. European sectors are mixed, in-fitting with the indecisive risk tone seen so far. Utilities takes the top spot, followed closely by Real Estate and then Insurance to complete the top three, whilst Healthcare lags.
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DB's Jim Reid concludes the overnight wrap
A risk-off tone has returned to markets with renewed fears around a further escalation in the Middle East, particularly amid increasing questions over whether the US might join Israel’s strikes against Iran. Those fears saw oil prices post further gains yesterday, with Brent Crude (+4.40%) closing at its highest since February, at $76.45/bbl even if it did hit an intra-day high of $78.50 on Friday. It is little changed this morning. Oil is still below its 2024 average of $80 so we have to put things in perspective from an inflationary angle but it was trading at $58.20 in early May so this fillip to growth and inflation has faded somewhat.
For risk, matters also weren’t helped by a soft batch of US data yesterday, which showed retail sales and industrial production both falling in May. So overall, the newsflow of the last 24 hours has leant in a more stagflationary direction, which meant both the S&P 500 (-0.84%) and Europe’s STOXX 600 (-0.85%) saw fresh declines yesterday. Meanwhile, increased geopolitical risks and higher oil saw the dollar index (+0.84%) post its best day in over a month.
In terms of events in the Middle East, concerns over escalation grew after a series of hawkish Trump posts towards Iran, in which he demanded “UNCONDITIONAL SURRENDER”, and said that “We now have complete and total control of the skies over Iran” and suggested that Iran’s leader Ayatollah Khamenei could be targeted: “We know exactly where the so-called “Supreme Leader” is hiding. He is an easy target, but is safe there - We are not going to take him out (kill!), at least not for now”. Those posts came ahead of the US president’s gathering with his national security team to discuss the Middle East conflict. Trump reportedly spoke to Israel’s Prime Minister Netanyahu after this meeting.
Ahead of that security meeting, Axios reported that Netanyahu believes Trump will attack Iran's underground enrichment facility at Fordow in the coming days, with CBS also reporting that Trump was considering joining the strikes against Iran’s nuclear facilities. US capabilities are seen as potentially key to targeting the site. However, direct US involvement would risk Iranian retaliation again US facilities in the region, with the New York Times reporting that Iran was preparing for such action in the event of US strikes. This renewed escalation in rhetoric has left uncertainty hanging over markets and, at the same time, we’ve seen continued airstrikes between Israel and Iran, with Khamenei’s social media channel posting overnight that “the battle begins”.
The other negative driver yesterday came from US data that was underwhelming across the board. Notably, retail sales fell -0.9% in May (vs. -0.6% expected), which was a second consecutive monthly decline. And 45 minutes later, we also found out that industrial production fell -0.2% in May (vs. unch. expected), so there was little respite there either. Admittedly, some of the core measures fared better, and the retail control group was up +0.4% (vs. +0.3% expected). But the releases still meant the Atlanta Fed’s GDPNow estimate for Q2 fell back a bit, down three-tenths to an annualised rate of 3.5%. Meanwhile, we also found out the NAHB’s latest housing market index had fallen to a two-and-a-half year low in June, at 32 (vs. 36 expected).
All that meant it was a rough day for risk assets, and the S&P 500 fell -0.84%. Apart from energy, all the major sector groups lost ground, including the Magnificent 7 (-1.06%). Several indicators pointed to more concern in markets, including the VIX index (+2.49pts), which jumped up to 21.60pts, whilst US HY spreads (+7bps) picked up from their 3-month low on Monday. And earlier in Europe, it hadn’t been much better, with major indices including the STOXX 600 (-0.85%), the DAX (-1.12%) and the CAC 40 (-0.76%) falling back.
Whilst the Middle East is the main focus for markets right now, today will also see the Fed announce their latest policy decision. A lot has happened since their last meeting in early May, including the dialling back of China tariffs, the Moody’s downgrade of the US credit rating, as well as the significant escalation in the Middle East. So given that uncertainty and the potential for fresh inflationary spikes, they’re widely expected to keep rates on hold again, and it means the focus will be on the dot plot for where they expect rates to go next. Our US economists think it’ll only signal one rate cut this year, which would be a hawkish shift from March, when they still signalled two cuts. However, they think it’s a close call, and they expect the Fed to mostly maintain existing signals about policy. For more info, see their full preview here.
Ahead of the Fed’s decision, US Treasuries rallied yesterday, on flight to quality, and as the weak data cemented the view that rate cuts were still likely in the months ahead. That meant yields fell across the curve, with the 2yr yield (-1.5bps) down to 3.95%, whilst the 10yr yield (-5.7bps) fell to 4.39%. The outperformance of long-end bonds came after news that the Fed will be holding a meeting on June 25 to discuss changes to the supplementary leverage ratio, which may allow banks to hold more Treasuries. At the short-end, the rally was limited by the rise in inflation expectations, with the 1yr US inflation swap up +7.8bps to 3.16%. We were at near 3 month lows below 3% as recently as of last Thursday, just before Israel’s strikes against Iran.
For Europe however, it was a different story, as inflation fears from higher energy prices dominated, pushing yields higher across the continent. In addition, there was more upbeat data from Germany, as the expectations component of the ZEW survey bounced up to 47.5 in June (vs. 35.0 expected). So yields on 10yr bunds (+0.8bps), OATs (+1.5bps) and BTPs (+3.3bps) all moved higher.
Asian equity markets are mixed this morning, with the Hang Seng index leading the losses in the region, declining by -1.17%. The Shanghai Composite (-0.20%) is also lower along with the ASX (-0.11%). However, the Nikkei (+0.69%) is defying the regional trend, advancing to a four-month high, supported by a weaker yen, while the KOSPI (+0.32%) is also making gains. US equity futures are flat and 10-year USTs have increased by +1.4bps, now standing just above 4.40% as we go to print.
Early morning data revealed that Japan's exports in May fell by -1.7% year-on-year, marking the most significant decline since September 2024, as the nation continues to face trade uncertainties. This decline was less severe than the -3.7% drop anticipated by Bloomberg but represents a reversal from the +2.0% increase recorded in April. Japan's trade deficit swelled to -637.6 billion yen in May, which is smaller than the expected -896.5 billion yen, compared to a revised deficit of -115.6 billion yen the previous month.
To the day ahead now, and the main highlight will be the Federal Reserve’s latest policy decision, along with Chair Powell’s subsequent press conference. Data releases include US housing starts and building permits for May, the weekly initial jobless claims, and the UK CPI print for May. ECB speakers include Elderson, Escriva, Villeroy, Knot, Panetta, Nagel, Centeno and Lane.