Markets resilient in the face of Middle East tension

General market commentary

Global equity markets witnessed a significant bout of volatility last week, primarily triggered by escalating geopolitical tensions in the Middle East. Iran launched missile attacks on Israel in retaliation for Israeli airstrikes targeting Iran’s nuclear infrastructure. This sharp escalation in hostilities rattled investor sentiment, leading to a broad sell-off across global equities. In the United States, the Dow Jones Industrial Average fell by approximately 1.8%, the S&P 500 declined by over 1%, and the Nasdaq dropped 1.3%. Investors responded with a classic flight-to-safety approach, boosting demand for defensive assets and driving oil prices higher by 5% to 7%. Defence-related shares such as Lockheed Martin and Northrop Grumman outperformed, while sectors sensitive to fuel costs, such as airlines, came under pressure. Technology equities were also mixed, with Adobe fallling by more than 5% despite raising its annual revenue forecast, due to concerns over the pace of its AI integration. In contrast, Oracle shares surged by over 7.5% to reach a record high, reflecting investor optimism surrounding its AI-driven growth potential. While these developments sparked short-term concern, market experts suggest the financial impact could be contained, provided the conflict does not spread beyond the current regional boundaries.

On the economic front, the United States continues to exhibit robust fundamentals despite ongoing global uncertainty. After a softer first quarter, largely due to inventory distortions, economic growth appears to be regaining momentum, with second-quarter GDP forecasts exceeding 3%. Consumer spending remains healthy, underpinned by a resilient labour market and wage growth that continues to outpace inflation, supporting positive real income. The unemployment rate has remained low at around 4.2%, while inflation has cooled significantly, with headline CPI at 2.4% and PPI at 2.6% in May, well below the peaks seen in 2022. These inflation trends give the Federal Reserve scope to ease interest rates later in 2025, particularly if economic conditions soften. At the same time, progress in U.S.-China trade talks and the potential extension of tariff pauses with other key partners have alleviated some trade-related anxieties. While higher tariffs could still weigh on goods prices, the broader U.S. economy remains services-driven, mitigating the wider impact. With clearer signals expected on monetary policy, taxation, and international trade in the coming months, many analysts believe the current volatility could present a buying opportunity.

Latest market and economic update

Asian equities were little changed on Monday as mixed Chinese economic data and ongoing Middle East tensions kept investor sentiment cautious. Chinese shares were flat after strong retail sales were offset by weaker industrial output, while Japanese and South Korean equities saw modest gains amid improving domestic outlooks and political stability.

US equity futures were little changed early morning as investors assessed mounting geopolitical risks amid intensifying conflict between Israel and Iran. The muted movement followed sharp losses on Friday, with tensions, surging oil prices, and uncertainty over Federal Reserve policy continuing to cast a shadow over market sentiment.

The STOXX 50 and STOXX 600 fell 1.4% and 1% on Friday, hitting near one-month lows as Middle East tensions drove investors to safer assets, with Stellantis, Ferrari, Mercedes-Benz, and BMW among the worst performers. Oil, gas, and defence shares like Shell, Eni, RWE, Rheinmetall, and Thales outperformed amid rising energy prices, with the STOXX 50 down 2.6% and STOXX 600 down 1.7% for the week.

The US dollar strengthened on Monday, with the dollar index edging up to around 98.3, supported by safe-haven demand amid escalating tensions between Israel and Iran and surging oil prices. The euro slipped to 1.1534 against the dollar as markets scaled back expectations of near-term Federal Reserve rate cuts due to renewed inflationary pressures.

Oil prices rose in Asian trade this morning, extending gains amid escalating Israel-Iran conflict and growing concerns over supply disruptions in the Middle East. Brent and WTI futures climbed modestly but remained below Friday’s four-and-a-half-month highs, as markets awaited clarity on potential US intervention and ongoing central bank decisions.

China’s factory output growth slowed to a six-month low of 5.8% in May, missing expectations, while retail sales picked up sharply to 6.4%, providing some relief amid ongoing trade tensions and a weak property sector. Despite government stimulus efforts, persistent headwinds and deepening deflationary pressures cast doubt on China’s ability to achieve its 5% growth target this year.

Equities on the move

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

Renault CEO Luca de Meo is set to leave in mid-July to reportedly become CEO of luxury group Kering, which faces challenges revitalising Gucci and managing heavy debt. De Meo, credited with turning around Renault through restructuring and a focus on electrification, would succeed Francois-Henri Pinault, who remains Kering’s chairman amid plans to separate CEO and chairman roles.

Shares of Visa and Mastercard fell about 5% on Friday after reports that Walmart, Amazon, and other retailers are considering issuing their own stablecoins, which could bypass traditional payment networks and reduce fees. The retailers’ plans depend on the Genius Act, a bill seeking to regulate stablecoins that has moved forward in Congress but still requires full approval.

Adobe’s shares fell by 7% on Friday amid investor concerns that the company's AI integration may take longer to generate returns, despite an increased annual revenue forecast. Analysts cited competitive pressures and delays in AI monetisation as key reasons, with several brokerages lowering their price targets following the Q2 results.

Deutsche Telekom and Nvidia are partnering to build an AI cloud for European manufacturers in Germany by 2026, with Nvidia supplying 10,000 GPUs to integrate into Deutsche Telekom’s data centres. This supports Germany’s push for digital sovereignty and modernising its industry, backed by government subsidies and EU funding aimed at boosting AI infrastructure to compete globally.

Novo Nordisk has regained its position as Europe’s most valuable publicly traded company, with its market value reaching $365 billion, surpassing SAP’s $364.3 billion. The rise follows the announcement of late-stage trials for its weight-loss drug amycretin and increased investor confidence after activist hedge fund Parvus Asset Management acquired a stake in the company.

BMO Capital Markets upgraded Oracle to Outperform, raising its price target to $235 due to strong software growth, rising operating income, and ambitious cloud growth targets through fiscal 2027. Despite higher capital expenditure and margin pressure, BMO expects operating income to grow 11% in 2026 and 14% in 2027, supported by growth in cloud database and SaaS revenue.

Wolfe Research downgraded GE Vernova from Outperform to Peer Perform, citing the shares’ 50% year-to-date rise and a valuation that already reflects significant earnings growth through the decade. While recognising the firm’s strong long-term prospects, Wolfe said the current price offers limited upside without further order growth, pricing strength, and estimate revisions.

Argus Research downgraded McDonald’s to Hold from Buy, citing weaker customer traffic and slower earnings growth due to resistance to ongoing menu price hikes. Despite challenges in the US and some key markets, the firm highlights McDonald’s international presence, dividend growth, and share buybacks as positives but has lowered its earnings and growth forecasts for 2025 and 2026.

RBC Capital Markets initiated coverage on Linde with an Outperform rating and $576 price target, citing consistent earnings growth, a strong capital return programme, and a $10.4 billion project backlog. Despite weak volumes, Linde’s pricing power and stable demand support a premium valuation, with RBC forecasting double-digit EPS growth and upside to $662.

Upcoming data and events

Financial markets face a pivotal start to the week, with the release of the New York Empire State Manufacturing Index and the OPEC Monthly Report offering early insights into economic and oil market conditions. Attention later in the week will turn to the Federal Reserve’s policy meeting, along with key retail sales figures and ongoing trade developments, all of which could significantly influence the trajectory of the recent equity rally.

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