Investor caution amid Israel-Iran conflict uncertainty

General market commentary

Global markets remained on edge amid escalating geopolitical tensions in the Middle East, with investor sentiment weighed down by fears of potential U.S. military involvement in the Israel-Iran conflict. Overnight, Israel targeted nuclear sites in Iran while Iran retaliated with missile and drone strikes, deepening uncertainty. Although U.S. President Donald Trump is expected to make a decision on possible intervention within two weeks, markets remain sceptical, noting that similar deadlines in the past have often passed without decisive action. Brent crude, despite a 2% dip on Friday, is poised for its third consecutive weekly gain, reflecting ongoing supply concerns driven by the conflict.

Elsewhere, U.S. markets were closed yesterday for the Juneteenth holiday, offering limited cues for global investors. Futures for the Nasdaq and S&P 500 edged lower in early Asian trading, reflecting caution rather than outright panic. Meanwhile, bond yields remained largely steady with the U.S. 10-year at 4.389% and the two-year slightly softer. The Bank of England held policy steady but indicated scope for further loosening if needed. Gold prices dipped slightly, heading for a weekly decline, as investors weighed safe-haven demand against shifting rate expectations.

Latest market and economic update

Most Asian markets gained on Friday following President Trump’s delay of a decision on U.S. involvement in the Israel-Iran conflict, providing short-term relief. However, Japan’s shares fell due to rising inflation and expectations of further Bank of Japan rate hikes, while tech-heavy indexes in Hong Kong and South Korea led the regional gains amid mixed performances elsewhere.

US equity futures declined on Friday as mounting geopolitical tensions, including the prospect of a US military strike on Iran, weighed heavily on investor sentiment. Despite the pullback, the S&P 500 and Nasdaq Composite are still modestly higher for the week, while the Dow Jones lags slightly in negative territory amid broader uncertainty.

European equities closed lower on Thursday, weighed by the Federal Reserve’s hawkish rate outlook and rising Middle East tensions. The STOXX 50 fell 1.3% to 5,200 and the STOXX 600 slipped 0.8% to 536, with broad-based losses. Adyen dropped 3.5%, leading tech declines, while major banks fell over 1.5%. LVMH lost 2.5% on broker downgrades and outlook concerns.

The US dollar index dipped slightly to around 98.6 on Friday but remained poised for a weekly gain, supported by safe-haven demand amid heightened tensions between Israel and Iran. Despite the modest pullback, the euro struggled against the dollar, with EUR/USD trading at 1.1515 as markets weighed the Fed's cautious stance and downgraded growth outlook.

Oil prices slipped in Asian trading on Friday as fears of an immediate escalation eased following the White House’s announcement that President Trump will decide on a potential strike against Iran within two weeks. Despite the dip, Brent and WTI futures remain on track for a third consecutive week of gains, supported by ongoing Middle East tensions and a significant draw in U.S. crude inventories.

Equities on the move

The following companies experienced moves in their share price driven by analyst ratings, quarterly earnings, or other news:

Microsoft is reportedly prepared to pause its high-stakes negotiations with OpenAI over critical issues such as the size of its future equity stake, while relying on their existing commercial contract until 2030. Despite tensions, both companies remain optimistic about their collaboration, with Microsoft’s investment playing a crucial role in OpenAI’s position in the AI sector.

SpaceX’s Starship rocket exploded into a fireball during testing in Texas, marking the latest setback in Elon Musk’s Mars programme amid ongoing technical failures this year. The company attributed the explosion to a nitrogen gas storage unit failure and confirmed all personnel were safe while investigations continue.

Airbus secured $21 billion in orders at the subdued Paris Air Show, including 10 jets for Taiwan’s Starlux Airlines, while Boeing made no new announcements following the Air India 787 crash. Despite supply chain challenges, Airbus reported fewer production disruptions and focused on expanding A220 orders, alongside a US-German defence partnership to develop aerial drones.

U.S. President Donald Trump has extended the deadline for ByteDance to divest TikTok’s U.S. assets to September 17, despite a law requiring the app’s sale or shutdown without progress. Trump, keen to keep TikTok active ahead of the 2024 election, expressed optimism over Chinese approval, while TikTok continues talks with U.S. officials amid legal challenges.

Deutsche Bank upgraded MTU Aero Engines to “buy” and raised its price target to €425, citing stronger guidance through 2030 and ongoing demand for the geared turbofan program. Improved medium-term targets, a decline in grounded aircraft, and continued airline orders support a more favourable long-term valuation.

Upcoming data and events

Key economic data today includes the Philadelphia Fed Manufacturing Index, Germany’s producer price index, France’s wage growth and business confidence, and the eurozone’s M3 money supply, while major companies reporting earnings include Accenture, Kroger, and CarMax.

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