Markets fear greater US involvement in Iran

General market commentary

US equity markets closed lower on Tuesday amid escalating geopolitical tensions, particularly surrounding the potential for deeper US involvement in the Israel-Iran conflict. The renewed uncertainty fuelled a flight to safety in global markets, as evidenced by a decline in US Treasury yields and a stronger US dollar. Oil prices surged, with West Texas Intermediate crude rising over 4% to $73.50 per barrel, reflecting concerns about supply disruptions. Equities broadly sold off, with the Nasdaq down 0.9%, the S&P 500 falling 0.8%, and the Dow Jones shedding 0.7%. Energy was the only sector to post gains, while healthcare led the decliners. In company news, renewable energy shares such as Enphase Energy and First Solar saw steep declines following regulatory headwinds and analyst downgrades.

Consumer spending data also weighed on sentiment. US retail sales in May fell more than expected, with headline figures showing a 0.9% drop, mainly due to softer demand for motor vehicles and building materials. However, control-group retail sales, which excludes more volatile components, rose 0.4%, in line with forecasts, suggesting underlying consumer resilience. Discretionary spending on items such as clothing and furniture remained firm, supported by healthy household balance sheets and a still-strong labour market. Looking ahead, attention turns to the Federal Reserve’s policy meeting, which concludes later this evening. While rates are expected to remain unchanged, markets will be closely watching for updated economic projections and any shift in the Fed’s tone regarding future rate cuts. We anticipate one to two cuts in the second half of 2025, which should provide some tailwind for growth.

Latest market and economic update

Asian equity markets were mixed this morning, with Hong Kong’s Hang Seng falling over 1% amid heightened geopolitical tensions linked to the Israel-Iran conflict and renewed concerns over potential U.S. military action. In contrast, Japan’s Nikkei 225 gained 0.7% to a four-month high, buoyed by a weaker yen despite trade data showing a sharp drop in exports to the U.S.

US equity futures were largely flat on Wednesday, as investors remained cautious ahead of the Federal Reserve’s interest rate decision and updated economic projections. After hours, sentiment stayed subdued following Tuesday’s broad-based equity declines, with energy shares the only bright spot thanks to surging oil prices amid heightened geopolitical tensions.

European equities fell yesterday, with the STOXX 600 down 0.8%, as escalating tensions between Iran and Israel weighed on sentiment and pushed oil prices higher. Banks led the declines with a 2.3% drop, while only energy and real estate ended in positive territory as UniCredit slid 3.6%, Generali lost 1.2% and the DAX fell 1.1% despite improved German investor morale.

The US dollar held firm around 98.7 on Wednesday, supported by safe-haven demand amid escalating Israel-Iran tensions and ahead of the Federal Reserve’s policy announcement. The euro remained under pressure, with the EUR/USD pair trading at 1.1504, as markets awaited guidance from the Fed on interest rates amid geopolitical risks and mixed US economic data.

Oil prices steadied in Asian trading on Wednesday following a sharp rise the previous day, as fears of supply disruptions from the ongoing Israel-Iran conflict and signs of possible U.S. involvement kept markets on edge. A surprise 10 million barrel draw in U.S. inventories also lent support, though concerns over weak economic data and slowing demand tempered gains.

Equities on the move

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

Airbus announced this morning that it will raise the upper end of its dividend payout range to 50%, up from the previous ceiling of 40%, reflecting confidence in its financial strength. The aerospace firm also confirmed that its guidance for 2025 remains unchanged, signalling steady performance expectations despite market uncertainties.

Top U.S. regulators plan to lower the enhanced supplementary leverage ratio (ESLR) for major banks, easing capital constraints that have limited their ability to hold U.S. Treasuries and participate in key market activity. The move is aimed at improving liquidity in the Treasuries market and reducing government borrowing costs amid rising yields and growing fiscal concerns.

Salesforce announced a 6% average price increase for many of its products, including Enterprise and Unlimited Editions for Sales Cloud, Service Cloud, and select Industries Clouds, effective August 1, 2025. The company also launched new Agentforce add-ons to replace Einstein offerings and introduced AI features across Slack plans to simplify and accelerate customers’ AI adoption.

Nuclear energy shares rose on Tuesday after a Senate panel proposed extending tax credits for nuclear, hydro, and geothermal power to 2036, with Oklo, Nano Nuclear, and NuScale Power all gaining. In contrast, solar equities fell as the proposal plans to phase out solar tax credits by 2028, showing how policy changes are shifting investor support within the energy sector.

Vinci reported a 3.3% decline in intercity network traffic in May, according to its Vinci Autoroutes unit, reflecting a slowdown in travel on its road networks. Despite this drop, the French concessions and construction company saw a contrasting trend in air travel, with airport passenger traffic rising 5.3% year on year during the same period, indicating stronger demand in the aviation sector.

Raytheon has received a $299.7 million contract modification from the U.S. Department of Defence to support the Evolved SeaSparrow Missile Block 2 programme, covering test equipment, spares, and missile assembly options. The work will be carried out across multiple locations, mostly funded by fiscal 2025 Navy weapons procurement funds, and is expected to be completed by September 2030.

Meta Platforms has reportedly offered signing bonuses of up to $100 million to attract engineers from OpenAI, according to OpenAI CEO Sam Altman. Despite the lucrative offers, Altman said none of OpenAI’s top talent have accepted, as Meta intensifies efforts to expand its artificial intelligence capabilities and compete directly with OpenAI.

U.S. President Donald Trump indicated he will likely extend the deadline for China-based ByteDance to divest TikTok’s U.S. assets, pending approval from China’s President Xi. Although Trump has twice delayed enforcement of the mandated ban, Democrats argue he lacks the legal authority to extend the deadline and question the viability of the proposed divestiture deal.

Ferrari has delayed the launch of its second fully electric vehicle from 2026 to 2028 due to weak demand for high-performance electric sports cars. The extra time will also help refine in-house battery and propulsion technology, ensuring performance standards are met, though limited consumer interest remains the key reason for the postponement.

Barclays has raised its price target on Nvidia shares to $200, citing strong supply chain demand and increased Compute revenue forecasts for the second half of the year. The bank expects higher system sales, solid Blackwell capacity utilisation, and margin improvements to drive earnings growth, maintaining its Overweight rating on the equity.

Pivotal Research raised its price target on Spotify to $900, citing strong user growth, monetisation efforts, and long-term earnings potential as it nears 1 billion monthly active users. The firm noted Spotify’s under-monetised advertising business and expansion into new content, but flagged risks including content costs, competition, and economic uncertainty.

Piper Sandler started coverage on SAP with an Overweight rating and a €350 price target, highlighting its growing Cloud ERP business now nearing half of revenue. The firm expects double-digit revenue growth and better margins through 2030, driven by ERP migrations, cross-selling, and advances in data and AI monetisation.

Bank of America reiterated its Buy rating on Caterpillar with a $385 price target, highlighting the Energy and Transportation division, about 40% of sales, as the next key growth driver supported by data centres, power generation and gas pipelines. Analysts expect the segment to add $3 to $3.50 in EPS, driven by rising backup power demand and gas infrastructure investment.

Wells Fargo reiterated its Underweight rating on Tesla, warning that free cash flow could turn negative for the first time since 2018, with Q2 deliveries likely to miss expectations. Analysts cited weak demand, shrinking margins, falling credit income, and product delays as key concerns, with the stock seen as overvalued despite a poor growth outlook.

Bank of America cut its price target on Qualcomm to $200 from $245 due to a cautious outlook on smartphone chip sales but kept a Buy rating, citing growth prospects in AI, automotive, and IoT. While smartphone revenue is expected to decline, Qualcomm’s diversification and current valuation offer an attractive entry point for investors.

Goldman Sachs upgraded XPeng to Buy and Nio to Neutral, citing XPeng’s improved costs, faster product launches, and better competitiveness, while Nio’s cost cuts may ease margin pressures. However, Goldman remains cautious on Nio’s volume growth, cash flow concerns, and high debt amid intense competition and volatile demand in the Chinese EV market.

Upcoming data and events

Key economic data due today includes the U.S. Federal Reserve's interest rate decision, initial jobless claims, and EIA crude oil inventories. The Fed is expected to maintain rates at 4.25%–4.50%, while markets anticipate a potential rate cut later in the year amid inflation concerns and geopolitical tensions.

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