Markets stay resilient amid Mideast tensions
The US struck Iranian nuclear facilities over the weekend, risking escalation of the conflict between Israel and Iran.
- Brent crude briefly surged to over $81 a barrel in early Asian trading before settling this morning to nearly unchanged from Friday’ s close at around $77.
- US equity and fixed income markets have had similarly muted reactions so far. The key variable for markets going forward is Tehran's next move. Markets will likely react more forcefully if Iran’s retaliation is viewed by the US as escalatory or if it risks global access to Gulf oil supplies.
US Treasury yields opened this morning only slightly lower than Friday.
- This happened despite these developments in the Middle East, weaker US retail and housing data last week, and the June FOMC meeting announcement last Wednesday.
- The Fed’s “dot plot” left expectations unchanged for two rate cuts this year, but removed one rate cut in 2026, signaling continuation of a “higher for longer” stance. Additionally, the committee forecasts inflation moving higher to 3.1% by year-end due to tariff impacts, too high for the Fed to cut more aggressively until it has more definitive data.
- The market appears to still be demanding a high level of term premium in longer-dated bonds to compensate for this policy uncertainty. Accordingly, we remain paused on adding additional duration to portfolios.
Global equities remain resilient despite persistent headline risk.
- Markets await further developments in the Middle East, potential trade deals (or not) ahead of the July 9 deadline, Q2 earnings season kicking off in mid-July, sector-level tariffs, and continued negotiation of Trump’s signature legislation in Congress.
- We can rationalize a relatively sanguine equity tape by looking at underlying leadership, with AI-led growth stocks outperforming defensives and cyclicals since April 1.
- If stocks can climb the summer wall of worry, we wouldn’t be surprised to see indices reach new all-time highs. But our neutral equity positioning is an acknowledgement that markets likely aren’t priced for worse-than expected economic, trade policy, and geopolitical outcomes.
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