By Mike Dolan
LONDON (Reuters) -What matters in U.S. and global markets today
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Whatever the endgame is in the unfolding Israel-Iran war, global financial markets will take their cue from the oil markets, where prices moved up slightly today as hopes for a quick ceasefire were dashed.
I’ll discuss this morning’s market news below. In my column today, I explain how President Trump’s mounting pressure on the Federal Reserve could backfire.
Today’s Market Minute
* U.S. President Donald Trump urged Iranians to evacuate Tehran, citing Iran’s rejection of a deal to curb nuclear weapons development, as Israel and Iran attacked each other for a fifth straight day on Tuesday.
* The Group of Seven nations expressed support for Israel in a statement late on Monday, labeling Iran as a source of instability in the Middle East, with the G7 leaders urging broader de-escalation of hostilities in the region.
* The Bank of Japan kept interest rates unchanged on Tuesday and announced that it would decelerate the pace of its balance sheet drawdown next year.
* Critical energy infrastructure in Israel and Iran has not escaped unscathed from the first few days of the countries’ escalated conflict. Worst-case scenarios have yet to be realized, but the war is already having a notable impact on energy production and exports in both countries, writes Roi energy columnist Ron Bousso.
* China has built up crude oil stockpiles while refining substantially less than what it has available from imports and domestic production, which will likely enable the world’s biggest oil importer to buy lower volumes in the coming months if prices surge over Middle East tensions, writes ROI Asia commodities columnist Clyde Russell.
Oil contained as Mideast war wages
Despite reports on Monday that Iran was pushing for a ceasefire, the two sides continued to bombard each other overnight.
U.S. President Donald Trump left the G7 summit in Canada early to focus on the crisis, issuing an alarming evacuation warning to the residents of Tehran in the process.
While U.S. crude prices edged back up above $72 per barrel again on Tuesday, they remain below Friday’s close and almost 8% lower than they were this time last year.
For now at least, neither Iran’s major oil export installations nor the critical regional waterway of the Straits of Hormuz have been closed off.
The firmer oil price was enough to knock back global stock markets again after Monday’s relief rally, with U.S. index futures giving up about half of yesterday’s jump.
Gold slipped back to Thursday’s levels, while the safe-haven Swiss franc firmed again ahead of the Swiss National Bank’s expected easing on Thursday.
Moves in U.S. Treasuries and the dollar were minimal ahead of the Federal Reserve’s two-day meeting starting later today.
Meanwhile, the Bank of Japan left its key rates unchanged as expected earlier on Tuesday. Japan’s yen weakened a touch on the BOJ decision, which also included a plan to decelerate the pace of its balance sheet drawdown next year, meaning the central bank will be buying more bonds next year than they would have under the prior plan.
“There is bigger downside risk for both Japan’s economy and prices,” BOJ Governor Kazuo Ueda said at a press briefing after the meeting.
The Fed is also unlikely to shift policy this week given the fog surrounding both the trade war and now oil price uncertainties around the Middle East war. Policymakers will, however, update their quarterly economic and rate projections and offer some guidance as to how they see the situation panning out.
On trade, Trump said on Tuesday that he still planned to send out letters to negotiating countries on the final U.S. demands before a 90-day reprieve on ‘reciprocal’ tariffs expires early next month. He also noted that pharma tariffs are coming.
The European Union was not yet offering a ‘fair deal,’ he said, though there was a chance of a deal in the ‘tough’ talks with Japan. There was better news for Britain as Trump signed an agreement on Monday formally lowering some tariffs on imports from the UK while the countries work toward a formal trade deal.
U.S. Senate Republicans, meantime, unveiled proposed changes to Trump’s sweeping tax cut and spending bill that would make some business-related tax breaks permanent while limiting the deduction for state and local income taxes.
Uncertainty about mounting debt piles and the long-term course of inflation have caused investors around the world to back away from super long-term government bonds where the price sensitivity to shifts in thinking is greatest.
That move away from long-duration isn’t helped by persistent political pressure on the Fed this year to immediately slash rates.
Today’s column looks at the risk that White House demands for lower borrowing costs could force the Fed to act tougher than it might have otherwise.
Chart of the day
The Chicago Fed’s index of U.S. financial conditions shows the loosest reading in more than three years, back to levels seen just before Russia’s invasion of Ukraine in 2022. Interest rates, stock prices and bond yields are key components of the index, but so, too, are energy prices.
And the latest reading came just before the pop in oil prices late last week on the outbreak of the Israel-Iran war.
This type of uncertainly is one more reason why the Fed is widely expected to keep interest rates on hold for a few more months.
Today’s events to watch
* U.S. May retail sales, import/export prices (8:30 EDT), May industrial production (9:15 EDT), April business/retail inventories (10:00 EDT)
* Federal Reserve’s Federal Open Market Committee starts two-day meeting on interest rates; decision and new forecasts on Wednesday
* Bank of Canada policy meeting minutes
* U.S. Treasury sells 5-year inflation protected securities
* U.S. corporate earnings: Jabil
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
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(By Mike Dolan; Editing by Anna Szymanski)
