Just as markets were beginning to recover from the economic dislocation caused by the U.S. trade war, a real war has erupted in the Middle East, threatening to shift global attention from tariffs to missiles, from inflation gauges to oil prices, and from investor optimism to risk recalibration.
A New Conflict Roils Markets
Crude oil prices surged as much as 14% intraday, reflecting renewed concern over global energy supply chains. Equity markets fell sharply in response, with the Dow Jones Industrial Average tumbling nearly 800 points. Volatility spiked as the VIX index—the market’s so-called “fear gauge”—climbed above 20, a level that often signals heightened investor anxiety and coming market turbulence (Source: Bloomberg News).
Encouraging Signs on the Inflation Front
Under calmer circumstances, Wednesday’s inflation report from the U.S. Bureau of Labor Statistics would likely have propelled equities higher. The Consumer Price Index (CPI) for May showed a modest 0.1% increase in both headline and core readings, the latter of which excludes the more volatile food and energy components. Economists had largely expected tariffs to begin pushing prices higher, yet inflation remains surprisingly restrained.
This outcome suggests that companies may be absorbing cost pressures or that exporting nations are taking margin hits, muting the near-term inflationary effects of trade-related price increases. For markets, that’s welcome news, though it was quickly overshadowed by geopolitical headlines.
Treasury Yields Ease Despite Oil Spike
Bond markets ended the week relatively stable, even as oil prices rose. The yield on the 10-year U.S. Treasury note closed Friday at 4.41%, reflecting mild concern about inflationary pressures stemming from rising energy prices. However, for the week overall, the yield curve shifted slightly lower.
Notably, Thursday’s auction of $22 billion in 30-year bonds drew solid investor interest. Markets had been bracing for weaker demand due to concerns over large U.S. deficits and reduced foreign appetite for dollar-based assets. Yet the bonds cleared at a yield of 4.84%—a level last seen in May when Moody’s became the final major ratings agency to strip the U.S. of its Aaa credit rating (Source: Bloomberg News).
Geopolitics Takes Center Stage
The coming week will likely be driven more by geopolitical developments than economic data. Investors will be watching closely for signs that the Israel-Iran conflict remains contained. Any indication that other nations could be drawn in—or that global oil supply is at risk—could prompt renewed selloffs in risk assets.
Markets were already navigating uncertain terrain due to the ongoing trade war and its potential ripple effects. A broader military conflict could compound volatility and dampen confidence across sectors.
The Fed Is in the Hot Seat
The Federal Reserve meets June 17-18, and while no change in interest rates is currently expected, the tone of the discussion will matter. With inflation readings subdued and signs of cooling in the labor market, pressure is mounting on the Fed to clarify its position and explain why rate cuts are not yet on the table.
Chairman Jerome Powell’s upcoming remarks will be closely dissected for clues about the path forward. Investors are eager for reassurance that the central bank will remain responsive, even as new risks emerge outside the traditional economic playbook.
Looking Ahead
This week reminded us that markets don’t operate in a vacuum. Political decisions, global conflicts and investor psychology all intersect to shape outcomes, sometimes in surprising and sobering ways. As we monitor developments in the Middle East and the Fed’s upcoming policy statement, our focus remains on ensuring that client portfolios are well-positioned to weather uncertainty and stay aligned with long-term goals.
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