US stock futures and global markets are broadly lower on escalation/contagion worries in the Middle East after Trump called for the evacuation of Tehran and cut short his G-7 visit, and yet, as BBG notes, traders don’t seem too perturbed, with futures remaining solidly above last week’s lows, when the conflict between Israel and Iran started. As of 8:00am, S&P 500 futures fell 0.6% at 5:25 am in New York, with Nasdaq 100 contracts -0.6% as all Mag7/Semis are weaker. In main overnight news, Trump left the G-7 in Canada early and later told reporters on Air Force One that he is “not too much in the mood to negotiate” with Iran, and wants a deal that is better than a ceasefire. A draft of the Senate’s version of the budget/tax bill drawing complaints from fiscal hawks and Section 899 features sees its first ex-US backlash with one money manager freezing all long-term investments in the US, per BBG. Elsewhere, the USD is stronger, Treasury yields are lower and commodity prices are higher. WTI crude rose, partially erasing Monday’s loss, while gold stayed near a record high. The Energy complex continues its gains and both Base and Precious have a bid. Retail Sales is the key macro data print today where consensus sees the the ex auto print up 0.3%, an increase from the previous month but the latest BofA card data suggests a miss is on deck.
In premarket trading, Mag 7stocks are mostly lower (Microsoft -0.9%, Tesla -0.6%, Alphabet -0.7%, Amazon -0.7%, Apple -0.4%, Meta -0.3%, Nvidia +0.8%). Here are the other notable premarket movers:
Sentiment shifted on Tuesday as investors reacted to fast-moving developments in the Middle East and their potential impact on global markets. While traders had earlier shown confidence the conflict would be contained, oil remains in focus, with a commodity that had hovered near pandemic-era lows emerging as an unexpected source of inflation. As Israel and Iran continued to trade attacks, Trump left the Group of Seven leaders’ meeting in Canada early to deal with the crisis. Though he hasn’t outlined what comes next, Trump told reporters aboard Air Force One he was looking for “a real end, not a ceasefire” to the conflict.
"Today’s downward movement, triggered by Trump, could actually last for a few days or even a few weeks,” said Alexandre Baradez, chief market analyst at IG in Paris. “There’s been little progress on trade negotiations and now there’s an added geopolitical risk. I don’t see a selloff but the VIX could certainly move higher.”
The risk of oil-driven price pressures adds to the uncertainty facing central banks. Fed officials have signaled a prolonged pause in interest rates, and investors will be watching Chair Jerome Powell’s remarks on Wednesday for clues about what could eventually prompt a policy move, and when.
Oil prices could spike to $120 a barrel if attacks by Iran halts traffic in the Strait of Hormuz, according to Jim Reid, global head of macro research and thematic strategy at Deutsche Bank, who agreed with an identical assessment from JPMorgan last week. “The Fed has got so many conflicting forces at the moment,” Reid told Bloomberg TV. “Tomorrow the Fed is just going to stay put and not give too much away. The oil price would give them another reason just to sit and wait.”
Even as the S&P 500 Index rose Monday on hopes the conflict between Iran and Israel won’t spill over into a broader war, the trading desk at JPMorgan's markets desk shifted away from its tactically bullish view on US stocks, citing growing risks and the greater likelihood of a retreat. “While there has been a strong buy-the-dip mentality with investors having been rewarded for fading negative news this year, we think it’s best to pull back on risk,” said JPM head of market intel, Andrew Tyler; he previously correctly predicted a multi-week stock rally back in April through this point as well as the previous market high. “Positioning indicates that irrespective of Israel-Iran, the market was setting up for a pullback,” he told clients early Monday.
On the home front, Senate Republicans proposed a tax plan that would reduce taxes for households and businesses, but also cut Medicaid benefits and add to US deficits. The bill would also end tax credits for wind and solar earlier than for other sources of power, sending solar stocks lower in premarket trading.
As Bloomberg adds, evidence is emerging that the risk-on momentum that has propelled the S&P 500 to a 21% gain from its April trough is hitting a rough patch. The gauge has been sitting near the 6,000 level for a month, while the stock market’s so-called fear index, or VIX, has climbed back above 20, showing continued investor angst over geopolitical developments and other risks.
Elsewhere, BofA’s fund manager survey showed investors are the most underweight on the US dollar in 20 years. “The biggest summer pain trade is long the buck,” Michael Hartnett wrote. And Amundi expects US economic growth to slow sharply to 1.6% in 2025-2026 and equity rotation to Europe and emerging markets to continue. The BofA survey also showed that investor sentiment is back to the “Goldilocks bull” levels seen before Trump’s April tariffs. The most crowded trades are long gold (41%), long Mag 7 (23%) and short US dollar (20%). Citi, meanwhile, forecast that gold will sink back below $3,000 an ounce on weaker investment demand, improving global growth forecasts and Fed rate cuts.
In Europe, the Stoxx 600 dropped 0.7% on drags from German, French, Italian and Spanish equities. Health care stocks extend their decline after President Donald Trump said tariffs on the sector are coming. The UK’s FTSE 100 relatively outperforms with a 0.5% drop, offset by gains for oil majors BP and Shell. Here are the biggest movers Tuesday:
Earlier in the session, Asian equities traded in a narrow range, as concerns over the Israel-Iran conflict countered gains in technology shares on optimism over artificial intelligence. The MSCI Asia Pacific Index swung between a gain of as much as 0.3% and loss of 0.2%. A sub-gauge of technology shares extended its recent outperformance, with chipmakers TSMC and Samsung among the biggest boosts Tuesday. Stocks rose in Taiwan, South Korea and Japan while Chinese shares drifted lower. In key regional news, the Bank of Japan maintained its benchmark interest rate at 0.5%, as expected. It also confirmed it will taper its bond purchases at a slower pace starting next April.
Overnight the Bank of Japan (BOJ) has left short-term interest rates at 0.5% as widely expected in a unanimous vote after a two-day policy meeting. More importantly, it announced that it intends to slow the rate at which it reduces its bond purchases next year. Beginning in April 2026, it will decrease its bond purchases by approximately 200 billion yen per quarter, down from the current rate of 400 billion yen per quarter. This action is likely aimed at minimizing market disruptions while still providing adequate support for the Japanese economy amidst economic uncertainty arising from US trade policies. Furthermore, the BOJ indicated that it will perform an interim assessment of the plan to reduce bond purchasing in June 2026. Looking ahead, attention is now directed towards BOJ Governor Kazuo Ueda post meeting comments. 5-year and 10-year Japanese Government Bonds (JGB) have increased by +4.3bps and +5.5bps respectively split before and after the meeting.
In FX, the Bloomberg Dollar Spot Index is little changed, though all G-10 peers are lower versus the US currency. Yen weakens to 144.89/USD after the Bank of Japan kept rates at 0.5% and said it will step back from the bond market at a slower pace from next year as expected.
In rates, treasuries yields are lower across maturities, outperforming European bonds after US President Trump played down the likelihood of a ceasefire in Israel’s war with Iran. S&P 500 futures are falling, adding to downside pressure on yields. Treasury yields are lower by 2bp-3bp with curve spreads little changed; 10-year is down about 3bp at 4.42%, outperforming bunds and gilts in the sector by 3bp-4bp. Money markets continue to price in less than two quarter-point Fed cuts by the end of the year. US session includes retail sales data and supply, particularly Hyundai Capital America 7-part bond offering and Treasury’s 5-year TIPS reopening.
In commodities, brent crude gained 1.8%, extending oil’s advance since hostilities started to more than 7% as traders parsed comments from President Trump on the Israel-Iran conflict and remain on edge about potential supply disruptions. Spot gold falls roughly $5 to trade near $3,380/oz.
Looking at today's calendar, US economic data slate includes May retail sales and import/export price indexes and June New York Fed services business activity (8:30am), May industrial production (9:15am), and April business inventories and June NAHB housing market index (10am).
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APAC stocks traded mixed/mostly lower with the region failing to coattail on Wall Street's gains, as geopolitical angst kept risk subdued, namely after US President Trump posted that "Everyone should immediately evacuate Tehran!" before cutting his G7 trip short, stoking fears of a US military offensive. Sentiment later stabilised after CBS reported that the US is not joining Israel offensively in its military operations against Iran, with US officials also backing a defensive stance amid assets in the region. ASX 200 traded slightly softer and in a narrow range, with upside in gold miners cushioning losses for the index. Nikkei 225 was kept afloat amid the softer JPY after the US and Japan failed to reach an agreement. The index saw a modest hawkish reaction to the BoJ decision which reduced the pace of JGB purchases as telegraphed. Hang Seng and Shanghai Comp opened flat before tilting lower in overall uneventful trade across the Chinese bourses amid the cautious risk tone with the immediate focus largely on geopolitics.
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European bourses (STOXX 600 -0.8%) opened lower across the board and sentiment continued to wane as the morning progressed; the complex currently just off worst levels. Sentiment today has been hit amid the currently tumultuous geopolitical environment in the Middle East. Iran and Israel have continued to strike each other overnight and US President Trump said "Everyone should immediately evacuate Tehran!", while also cutting his G7 trip short. European sectors hold a strong negative bias with only handful of sectors in positive territory. Unsurprisingly, Energy takes the top spot with the complex boosted by the ongoing strength in oil prices amid geopolitical uncertainty in the Middle East. Banks sit at the foot of the pile, joined closely by Telecoms and then Media.
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DB's Jim Reid concldues the overnight wrap
After a weekend during which Israel and Iran continued to trade strikes, it was noticeable that Israel hadn't directly targeted oil production and transportation facilities, and Iran showed little sign that it was considering closing the Strait of Hormuz or targeting US interests in the region. So it felt yesterday that to get an additional and notable risk-off we needed further escalations.
As such, yesterday became steadily more risk-on with extra momentum from a WSJ report, just under 90 minutes after the US open, which said that Iran was signalling it wanted to end hostilities and restart nuclear talks. So that led to a significant easing of the broad market stress, with the S&P 500 (+0.94%) recovering the vast majority of Friday’s -1.13% decline. Similarly, gold fell -1.37%, reversing the spike that saw it post a new record high on Friday. And in line with that theme, some of the assets most affected by the conflict did very well, with the Israeli shekel seeing its biggest daily gain against the US Dollar (+3.49%) since 1998, with Israel’s TA-35 index (+1.82%) closing at an all-time high.
However, just as markets were getting more comfortable, we've seen a bit of a reversal overnight after Trump left the G7 meeting a day early with reports that he has requested the National Security Council to convene on his return to Washington. He posted that “Everyone should immediately evacuate Tehran!” There was no extra context. In fact, as DB‘s Michael Hsueh has pointed out, the G7 leaders' statement was only 121 words, compared with June 2024's statement of 19,834 words, and Dec 2023's statement of 5,108 words. It also only discussed the Israel/Iran conflict whereas normally a whole host of topics are covered.
So we're all in a bit of a limbo in terms of whether anything substantive came out of the summit and whether Trump was alluding to new information with his post and his early G7 meeting departure. Before his post, that WSJ headline was backed up elsewhere. For instance, Reuters reported shortly afterwards that Iran had asked Qatar, Saudi Arabia and Oman to ask President Trump to get Israel to agree to a ceasefire, in return for more flexibility from Iran in the nuclear talks. And Trump himself later said at the G7 summit that Iran would “like to talk, but they should have done that before”.
There are still big questions as to whether Israel would be receptive to a ceasefire, given that it is seeking to destroy Iran’s nuclear program. Moreover, the public rhetoric hasn’t leant that way either, and Iran’s Mehr News Agency cited a senior security official saying that it is prepared to deliver a “major blow” to Israel after its strikes. So there is maybe diplomatic movement behind the scenes but not yet in the open.
Indeed, there have been no signs of de-escalation in the aerial war, with reports of explosions against in Tehran overnight, while Iran launched more missiles into Israel. Oil is back up around half a percent this morning after closing at $73.23/bbl, down -1.35% on the day and nearly -7% from the intraday peak of $78.50/bbl on Friday after the initial attacks. It is still around +7.7% higher since renewed fears of escalation emerged last Wednesday.
Amidst all the news, global equities put in a solid session yesterday, with the S&P 500 (+0.94%) advancing, whilst the STOXX 600 (+0.36%) finally ended a run of 5 consecutive declines. In both cases, it was the more cyclical sectors that led the advance, and every one of the Magnificent 7 (+1.57%) advanced on the day as well. Other signs of market stress eased too, with the VIX index down -1.71pts to 19.11pts, whilst US HY spreads tightened -11bps. S&P (-0.41%) and Nasdaq (-0.47%) futures are lower this morning though.
We have still seen only a minimal reaction in equities so far and perhaps that's because absent a serious escalation, markets are aware of the historical playbook around geopolitical shocks. I looked at this in my chart of the day yesterday (link here), which shows how the usual pattern is for a short, sharp shock that then reverses. Moreover, this time our strategists have argued the bar for a significant sell-off was higher, since equity positioning was already quite light. If you look at the geopolitical shocks that have had a bigger and more sustained market impact, it’s generally the stagflation shocks that cause a simultaneous inflation spike alongside a hit to growth. Henry took a look at those in a piece yesterday (link here), with the biggest impacts coming from the oil shocks of the 1970s, the Gulf War in 1990, and Russia’s invasion of Ukraine in 2022. Those cases all led to a huge oil price spike, whereas today’s move still leaves prices beneath their 2024 average.
In other news, Senate Republicans released their version of the budget bill last night. Compared with the bill passed in the House last month, the Senate version makes permanent three business tax breaks and scales back a proposed tax on university endowments. It also includes a placeholder $10k cap on the state and local tax deduction ($40k in the House version), as Republicans remain divided over the level of this tax break.
Back to markets and the renewed focus on US fiscal coupled with still elevated oil prices but a reduction in flight to quality, put pressure on Treasuries yesterday, with 10yr Treasury yields rising +4.7bps on the day to 4.45%, while 30yr yields (+6.1bps to 4.96%) moved back to within touching distance of 5%. Much of that rise in yields played out in the latter part of the US session, and in Europe yields on 10yr bunds (-0.9bps), OATs (-1.9bps) and BTPs (-3.0bps) had all closed lower.
Overnight the Bank of Japan (BOJ) has left short-term interest rates at 0.5% as widely expected in a unanimous vote after a two-day policy meeting. More importantly, it announced that it intends to slow the rate at which it reduces its bond purchases next year. Beginning in April 2026, it will decrease its bond purchases by approximately 200 billion yen per quarter, down from the current rate of 400 billion yen per quarter. This action is likely aimed at minimizing market disruptions while still providing adequate support for the Japanese economy amidst economic uncertainty arising from US trade policies. Furthermore, the BOJ indicated that it will perform an interim assessment of the plan to reduce bond purchasing in June 2026. Looking ahead, attention is now directed towards BOJ Governor Kazuo Ueda post meeting comments. 5-year and 10-year Japanese Government Bonds (JGB) have increased by +4.3bps and +5.5bps respectively split before and after the meeting.
In Asian equity markets, the Hang Seng (-0.12%), the CSI (-0.15%), the Shanghai Composite (-0.18%), and the S&P/ASX 200 (-0.15%) are all experiencing slight declines. Conversely, the Nikkei (+0.55%) and the KOSPI (+0.30%) are stronger.
Elsewhere, there was very little data of note yesterday. One release was the Empire State manufacturing survey for June, which unexpectedly fell to -16.0 (vs. -6.0 expected), beneath every economist’s expectation on Bloomberg. However, there was a bit more optimism on the forward-looking indicators, and the expectations component for general business conditions moved up to a 4-month high of 21.2.
To the day ahead now, and data releases include US retail sales, industrial production and capacity utilisation for May, the NAHB’s housing market index for June, as well as Germany’s ZEW survey for June. Otherwise, central bank speakers include the ECB’s Villeroy and Centeno.