Markets cautious amid Middle East escalation, strong China data provides tentative support

Global markets opened the week on shaky footing as geopolitical tensions in the Middle East escalated further over the weekend, renewing concerns over energy security and regional stability. Investors are juggling rising oil prices, global inflation risks, and localized optimism stemming from stronger-than-expected Chinese economic data. This dynamic created a mixed market picture across asset classes as participants positioned themselves ahead of key central bank meetings and geopolitical developments.

Israel-Iran conflict drives volatility across asset classes

Renewed hostilities between Israel and Iran dominated sentiment, with both sides exchanging strikes over the weekend. Israel extended its air campaign by targeting Iranian facilities in Tehran and beyond, while Iran responded with waves of drones and missiles.

• The conflict is prompting investors to assess the risk of broader regional involvement, including questions about potential US military engagement.
• Comments from Donald Trump suggested the situation might need to “play out” before any diplomatic resolution is viable, further fueling uncertainty.
• The conflict is expected to feature heavily in the G7 Summit discussions, raising the geopolitical stakes alongside ongoing concerns over Russia and global tariffs.

Oil prices surge on supply disruption fears

Crude oil saw significant upward pressure:

• Brent crude surged as much as 5.5% in early Asia before settling with a 1% gain, closing at $73.72 per barrel.
• West Texas Intermediate (WTI) mirrored the move amid worries that prolonged hostilities could impact supply chains, especially if maritime routes like the Strait of Hormuz become involved.
• The futures curve steepened, reflecting market expectations of continued supply risk and price volatility.

Gold holds ground as safe-haven demand rises

Despite the risk-on tone in some equity pockets, gold remained firm, supported by:

• Heightened geopolitical tensions.
• Continued central bank interest in the metal as a strategic reserve asset.
• Ongoing inflation uncertainty tied to rising energy prices.

Spot gold was little changed, maintaining its position near recent highs as investors balanced risk hedging with liquidity needs.

Equity markets mixed: Defensive bias vs. local optimism

Global equities reflected a cautious but not outright bearish tone:

• S&P 500 futures edged up 1%, Nikkei 225 rose 1.1%, helped by a weaker yen and strength in Japanese defense stocks.
• Euro Stoxx 50 futures declined 2%, marking their fourth consecutive day of losses, while MSCI Asia Pacific Index posted marginal gains.
• The Shanghai Composite and Hang Seng were both little changed after opening lower.
• The gains in Japanese stocks were further supported by defense cooperation talks with the EU and a weaker yen (down 0.3% to 144.48).

China macro data surprises to the upside

China delivered a dose of optimism with stronger-than-expected May data:

• Retail sales jumped 4% YoY, beating expectations of 4.9%, showing signs of consumer resilience.

• Broader economic data was mixed, but the strength in consumption lifted sentiment and helped Hong Kong equities recover from earlier losses.
• Investors are watching to see if this momentum is sustained or remains an outlier in a broader growth slowdown.

Currency markets: Dollar firm, shekel under pressure

Currency markets reflected both safe-haven flows and geopolitical reactions:

• The Bloomberg Dollar Spot Index rose 2%, reflecting a slight bid for liquidity.
• Euro slipped 2% to $1.1527, while GBP fell 0.3% to $1.3536.
• The Israeli shekel weakened significantly on Friday following the initial airstrikes, and remains under pressure as the conflict continues.

Bond market: Yields creep up amid uncertainty

In fixed income:

• US 10-year Treasury yields rose 3 basis points to 43%, as traders anticipate upcoming central bank decisions and inflation data.
• Australian 10-year yields jumped 8 basis points, the largest daily increase since early April, signaling broader global rate sensitivity.

Cryptocurrencies rebound modestly after pullback

Digital assets showed signs of stabilizing after recent losses:

• Bitcoin rose 1% to $105,936, ending a five-day losing streak.
• Ethereum gained 6% to $2,569, following a recent sharp sell-off.

While not fully decoupled from traditional risk assets, crypto appears to be regaining some traction as investors weigh alternative hedges.

Looking ahead: Event risks and market implications

Key developments on the horizon:

• The G7 Summit will be closely watched for potential unified responses or calls for de-escalation in the Middle East.
• Central bank decisions from the Federal Reserve and Bank of Japan later this week could shift market dynamics, particularly if guidance diverges.
• Oil and inflation are now front and center in global risk models. Persistent price spikes could complicate easing cycles and raise stagflation concerns.

Markets are navigating a delicate balance between geopolitical shocks and localized economic signals. While Chinese data offered a brief reprieve, risks stemming from the Israel-Iran conflict and central bank policy divergence are keeping investors defensive. Maintaining a flexible approach with exposure to energy, gold, and select defensive equities appears prudent in the current environment. Expect elevated volatility and heightened sensitivity to headline risk through the week.

Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.

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