Investors Eye Fed Meeting for Rate Clues as Market Rally Faces Crossroads

Economic

Summary:

The Federal Reserve’s upcoming policy meeting will be a key test for U.S. markets, with investors seeking signals on future rate cuts amid softening labor data and easing inflation...

Fed’s Dilemma: Balancing Growth and Inflation

With the S&P 500 climbing toward its all-time peak, attention now shifts to the Federal Reserve’s two-day meeting, where policymakers must reconcile slowing labor market data with lingering inflation concerns. Though no change to the 4.25%-4.50% federal funds rate is expected, the tone of Chair Jerome Powell and the updated economic projections will shape expectations for potential rate cuts later this year.

At its last meeting, the Fed acknowledged increased risks to both inflation and unemployment, signaling that its dual mandate—full employment and price stability—remains in delicate balance. Recent data suggests labor market cooling, giving rise to speculation that the Fed may be moving closer to supporting the economy through rate reductions.

Labor Market Weakness Could Tilt Policy Outlook

Economists are closely watching the Fed’s updated unemployment forecast. Daiwa Capital Markets’ Larry Werther anticipates a year-end jobless rate of 4.6%, slightly above the Fed’s last projection of 4.4%. This would reflect recent jobless claims data and reinforce the case for preemptive rate cuts to prevent broader economic softening.

Markets currently price in two rate cuts before year-end, with the first potentially arriving in September. These bets have been strengthened by this week’s softer-than-expected inflation reports, which suggest that price pressures are not accelerating.

Retail Sales and Trump’s Influence in the Spotlight

Beyond the Fed’s decision, next Tuesday’s retail sales data will be another key barometer. Investors are eager to determine whether recent tariff measures are inflating consumer prices and curbing spending. A stronger-than-expected result could muddy the case for cuts, while weakness would likely validate the Fed’s dovish lean.

Meanwhile, political pressure looms. President Trump has regularly urged the Fed to lower rates and is expected to soon announce his nominee to succeed Jerome Powell. While Trump recently stated he won’t fire Powell, the uncertainty around Fed leadership could inject fresh volatility depending on the nominee’s stance.

Market Fragility Despite Strong Gains

Although the S&P 500 has risen nearly 3% year-to-date and an impressive 21% from its April low, some analysts warn that the rally may be overstretched. Empower’s Marta Norton noted that any deviation from the current “benign narrative”—where growth moderates, inflation cools, and rate cuts arrive—could quickly trigger volatility.

With geopolitical shocks (such as Israel’s strike on Iran) already pressuring markets, and a 90-day tariff pause set to expire July 8, investors must remain alert to multiple macro risks that could derail sentiment.

The Fed’s June meeting is pivotal. If Powell successfully navigates expectations by showing openness to cuts without sounding alarmist, the current equity rally may continue. But any hint of reluctance or disagreement within the Fed could undermine confidence and challenge Wall Street’s upward momentum. As global and domestic uncertainties rise, the margin for policy missteps has narrowed.

Source: Bloomberg

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Gerik

Economic

Middle East Situation

Geopolitical Shock Waves Hit US Markets

The early morning airstrikes by Israel on Iran’s nuclear sites ignited a sharp decline in US stock futures on Friday, as the specter of expanded conflict in the Middle East triggered widespread risk-off sentiment. At 4:32 a.m. ET, Dow futures fell over 500 points, or 1.17%, with the S&P 500 and Nasdaq also shedding over 1%. The small-cap-heavy Russell 2000 futures sank by 1.6%, reflecting a particularly strong pullback among domestic stocks vulnerable to energy price shocks and geopolitical risk.

The move came amid rising concern that the region’s instability—following Iran’s retaliatory drone barrage—could disrupt global oil flows and inject renewed volatility into financial markets just days before key nuclear negotiations between Iran and the US were set to resume.

Oil Prices Surge, Fueling Divergent Sector Impacts

Oil prices surged more than 6%, reflecting fears of supply disruptions from one of the world’s most strategically vital crude-producing regions. Energy majors like Chevron and ExxonMobil saw pre-market gains near 3%, positioning the sector as an early winner from the crisis.

Conversely, airline stocks nosedived, weighed down by the expected spike in jet fuel costs. United Airlines dropped 4.8%, while Delta, American, and Southwest all saw losses between 2.5% and 3.9%. These declines illustrate how quickly commodity shocks can upend transportation-sector profit forecasts, particularly amid seasonal travel peaks.

Defense Stocks Rally on Conflict-Driven Demand Expectations

Defense contractors rallied strongly as investors rotated into sectors seen as beneficiaries of increased military activity and defense spending. Lockheed Martin rose 4.7%, RTX (formerly Raytheon Technologies) jumped 5.5%, and Northrop Grumman and L3Harris Technologies posted gains exceeding 4%. The reaction signals growing expectations of an extended geopolitical cycle likely to boost orders for defense systems and services.

Despite Friday’s pullback, the S&P 500 remains just 1.8% below its all-time high, supported by a strong May rally built on improving earnings and signs of a softening stance from President Trump on trade. The Nasdaq, though more vulnerable to rate expectations and volatility, is still only 2.8% below its December record.

Investors are now turning to the Federal Reserve's upcoming meeting next week. While no rate change is expected, recent inflation and labor signals have rekindled hopes of a possible cut later this year. However, geopolitical tensions could complicate the Fed’s messaging and affect market expectations for monetary easing.

The Israeli-Iranian confrontation has revived geopolitical fears at a time when financial markets had largely priced in a soft landing and stable rate environment. As energy markets react and equity sectors diverge sharply, investors may face renewed volatility in the near term—especially if retaliatory actions escalate or the conflict broadens. The coming days will test both diplomatic channels and market resilience.

Source: Reuters

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Gerik

Economic

Energy

Massive Investment Needed to Meet EU Nuclear Goals

According to a draft report by the European Commission, the European Union must mobilize €241 billion to fulfill its nuclear energy expansion goals by 2050. This figure includes €205 billion for new reactor construction and €36 billion for extending the operational life of current reactors. These ambitious plans aim to raise nuclear capacity from the current 98 GW to 109 GW by mid-century, reflecting a modest growth in installed capacity but a significant investment requirement.

This push is framed within the EU's broader clean energy transition strategy, where nuclear power—currently supplying about 24% of the bloc's electricity—plays a controversial yet central role.

Private Capital Needed, But Risk Aversion Persists

Despite the potential for stable long-term returns, recent nuclear projects in Europe have suffered from chronic delays and budget overruns, making them unattractive to many private investors. The Commission warns that a five-year delay in planned projects could inflate costs by another €45 billion, exacerbating financing challenges.

In response, the draft proposes developing new "de-risking instruments" to incentivize private capital, including a pilot €500 million power purchase agreement (PPA) program co-launched by the European Investment Bank. These PPAs, typically long-term contracts to buy electricity at agreed prices, would help provide income predictability for nuclear investors.

Political Divide Hampers Unified Policy Support

Nuclear energy has long been a point of contention within the EU. France, which depends on nuclear for most of its power, remains a vocal proponent, while Germany—despite its industrial power—has exited nuclear altogether. This division has historically led to EU-wide energy policies that sidestep nuclear, offering neither direct subsidies nor unified policy backing for new construction.

As a result, although twelve member states currently operate nuclear reactors—including expanding fleets in Hungary and Slovakia—national-level initiatives dominate, with countries like Poland entering the sector for the first time to bolster energy security and decarbonization efforts.

The Broader Context: Energy Security and Decarbonization

Russia’s war in Ukraine and the ensuing energy crisis have prompted several EU countries to reconsider nuclear as a low-carbon and geopolitically secure power source. However, high initial capital costs and the long lead times for reactor construction pose formidable challenges. The current investment gap underscores the need for not only financial innovation but also greater political alignment if the EU is to meet its 2050 energy and emissions goals.

While the draft proposal signals growing EU support for nuclear as part of its energy mix, achieving the required €241 billion investment will depend on the bloc’s ability to create a robust and attractive financial framework. Without effective risk-sharing mechanisms and political consensus, the vision of a nuclear-powered EU clean energy future may remain delayed and underfunded.

Source: Reuters

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Michelle

Commodity

Political

As tensions surge following Israeli strikes on Iran, fears have resurfaced that the Tehran could retaliate by targeting one of the world's most vital oil arteries — the Strait of Hormuz.

The Strait of Hormuz, which connects the Persian Gulf to the Arabian Sea, sees roughly 20 million barrels per day of oil and oil products pass through, accounting for nearly one-fifth of global oil shipments. Any move to block it would ripple through energy markets.

However, market watchers believe a full-scale disruption of global oil flows by closing the waterway is unlikely, and might even be physically impossible.

There really is "no net benefit" that comes with impeding the passage of oil through the Strait of Hormuz, especially given how Iranian oil infrastructure has not been directly targeted, said Ellen Wald, co-founder of Washington Ivy Advisors. She added that any such action would likely trigger further retaliation.

She also warned that any major spike in oil prices caused by a closure could draw backlash from Iran's largest oil customer: China.

Their friends will suffer more than their enemies… So it's very hard to see that happening.

"China does not want the flow of oil out of the Persian Gulf to be disrupted in any way, and China does not want the price of oil to rise. So they're going to bring the full weight of their economic power to bear on Iran," Wald explained.

China is the number one importer of Iranian oil, reportedly accounting for over three-quarters of its oil exports. The world's second-largest economy is also Iran's largest trade partner.

"Their friends will suffer more than their enemies … So it's very hard to see that happening," said Anas Alhajji, managing partner at Energy Outlook Advisors, adding that disrupting the channel could be more of a bane than a boon for Tehran, given how most of Iran's daily consumption goods come via that route.

"It's not in their interest to cause problems because they will suffer first."

Iran in 2018 threatened to shut the Strait of Hormuz when tensions spiked following the U.S. withdrawal from the nuclear deal and the reimposition of sanctions. Prior to that, another major threat reportedly came in 2011 and 2012, when Iranian officials, including then–Vice President Mohammad-Reza Rahimi, warned of a potential closure if the West slapped further sanctions on its oil exports over its nuclear program.

Impossible to close the strait?

The Strait of Hormuz, which is 35 to 60 miles (55 to 95 kilometers) wide, connects the Persian Gulf and the Arabian Sea.

The idea of shutting the Hormuz waterway has been a recurring rhetorical tool but never been acted upon, with analysts saying that it's simply not possible.

"Let's be real about the Strait of Hormuz. First of all, most of it is in Oman, not in Iran. Number two, it's wide enough that the Iranians cannot close it," said Alhajji.

Similarly, Washington Ivy Advisors' Wald noted that although many ships pass through Iranian waters, vessels can still traverse alternative routes via the United Arab Emirates and Oman.

"Any blockade of the Strait of Hormuz will be a 'last resort' option for Iran and likely contingent on a military engagement between U.S. and Iran," said Vivek Dhar, Commonwealth Bank of Australia's director of mining and energy commodities research.

RBC Capital Markets' Helima Croft suggested that while there could be some disruption, a full-scale blockade was unlikely.

"It is our understanding that it would be extremely difficult for Iran to close the strait for an extended period given the presence of the US Fifth Fleet in Bahrain. Nevertheless, Iran could still launch attacks on tankers and mine the strait to disrupt maritime traffic," said Croft, head of global commodity strategy and MENA research at RBC.

U.S. President Trump has warned of possible military action if negotiations with Iran over its nuclear program break down, but it is uncertain whether these threats are meant to raise the stakes of U.S.-Iran talks or simply to increase pressure at the negotiating table, said Dhar.

Israel carried out a wave of airstrikes on Iran early Friday morning local time, claiming the attacks were aimed at facilities linked to Tehran's nuclear program.

According to Iranian state media, the strikes killed Mohammad Hossein Bagheri, chief of the Iranian Armed Forces, along with Hossein Salami, the commander-in-chief of Iran's Islamic Revolutionary Guard Corps.

While a closure of the strait remains highly unlikely, the escalating conflict has prompted some to consider even the faint possibility.

"[Closing the strait] is kind of an extreme scenario, although we are in an extreme situation," said Amena Bakr, head of Middle East and OPEC+ insights at Kpler.

"So that's why I'm not putting that option completely off the table. We need to consider it."

Crude futures jumped as much as 13% after Israel launched airstrikes against Iran early Friday. Global benchmark Brent futures were up 6.5% at $73.88 per barrel as of 4.30 p.m. Singapore time, while the U.S. West Texas Intermediate was trading 6.7% higher at $72.57 per barrel.

Source: CNBC

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Glendon

Economic

Forex

Euro zone industry and trade took major hits in April, likely reflecting U.S. tariffs announcements, challenging the view of economists that the bloc is holding up well in the face of economic turmoil.

Industrial production fell by 2.4% on the month in April, more than the already-weak expectations for a 1.7% fall in a Reuters poll of economists, as every segment within industry suffered a contraction, data from Eurostat showed on Friday.

Trade also suffered, with the surplus of the 20 nations sharing the euro falling to just 9.9 billion euros compared with the previous month's 37.3 billion euros.

The weak figures are not unexpected as U.S. firms frontloaded purchases in February and March in anticipation of the April 2 tariff announcement.

But the April reversal is larger than many had anticipated, indicating downside risks to economic growth forecasts, which are already below 1% for the year.

The euro zone's exports to nations outside the bloc fell by 8.2% on the month, while figures for the broader EU showed a 9.7% drop, Eurostat said.

The EU's total exports to the U.S., its biggest trading partner, totalled 47.6 billion euros in the month, well down on the 71.1 billion reported a month earlier, which included the frontloading and was itself considered unusually high.

The drop was mainly driven by sharply lower chemicals exports, likely relating mostly to pharmaceutical exports from Ireland, which hosts a number of international firms that are located there for tax reasons.

Irish pharmaceutical exports to the U.S. surged in the months leading up to the tariffs, pushing up economic growth to exceptional levels.

The figures also explain why Irish industry contracted by 15% on the month, leading euro zone production lower.

The hit to industry was so large that it erased nearly all gains from the past year, and output in April was just 0.8% higher than a year earlier, with only non-durable consumer goods showing any annualised increase.

Still, surveys conducted since the April turmoil indicate some modest optimism in manufacturing, suggesting that the sector is not going back into recession even if its recovery will be shallow.

Source: Yahoo Finance

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Gerik

Economic

Japan Emerges as a Global M&A Bright Spot

In stark contrast to the worldwide M&A malaise, Japan is witnessing a sharp uptick in mergers and acquisitions as foreign and domestic investors seize opportunities in a low-valuation, policy-friendly environment. According to data from Dealogic, the total value of M&A activity in Japan jumped 135% in USD terms during the first four months of 2025, building on a 39% surge in 2024 that marked the country’s highest deal volume in 17 years, totaling $180 billion.

This strong momentum defies the broader global trend, where M&A growth has been sluggish, with total activity up only 8% so far this year and hovering near decade-lows.

Valuation Gap and Policy Support Drive Investment Interest

Japan's relatively low corporate valuations have made its companies attractive targets, especially in sectors ripe for consolidation. The Bank of Japan’s continued low interest rate policy—holding its benchmark rate at 0.5% compared to 4.25%-4.5% in the U.S. and 2% in the Eurozone—further supports deal financing and investor appetite.

Long-term Japanese government bond yields remain around 1.5%, making leveraged acquisitions more feasible compared to other developed markets. As Daisuke Kitta of Blackstone Group noted, Japan stands out globally for its political stability and openness to foreign investment, a rare combination in the current macroeconomic climate.

Sector-Wide M&A Surge: From Finance to Pharma

Japan's M&A activity spans across key industries. In financial services, Nomura is acquiring asset management units from Macquarie, while Dai-ichi Life is investing in Capula and M&G. In retail, Bain Capital is taking over supermarket chain Seven & i, and Ain is acquiring rival pharmacy chain Kraft. The healthcare sector is also heating up, with Shionogi buying pharmaceutical units from JT, and Bain Capital acquiring Mitsubishi Tanabe Pharma.

Outbound M&A is on the rise as well, exemplified by Nippon Steel’s acquisition of US Steel—a response to global protectionism by acquiring local manufacturing footholds overseas.

Even unsolicited takeovers are increasing, such as Yageo’s bid for Shibaura Electronics, signaling heightened competitive tension.

Corporate Governance Evolution and Portfolio Optimization

Experts suggest that Japanese corporate culture is undergoing a meaningful shift. Takashi Ohara of Bain & Co. emphasized that company leaders are beginning to view stock prices as a key performance metric, departing from the traditional priority of merely completing their terms without disruption.

More firms are recognizing the need to divest non-core businesses to improve efficiency and focus. Hitachi is cited as a model of such transformation, while many others are just starting the journey.

Analysts, including Azusa Owa from Bain, warn that Japan’s attractiveness for M&A could wane if underlying factors—such as a weak yen, low interest rates, and subdued stock market valuations—begin to shift. Nonetheless, the current conditions present a fertile environment for consolidation, particularly in industries that remain fragmented.

Japan’s M&A boom highlights a structural divergence from global headwinds, driven by corporate reform, supportive fiscal conditions, and investor confidence. If macroeconomic stability persists, Japan may continue to outperform as a strategic hub for deal-making in Asia through 2025 and beyond.

Source: Nikkei Asia

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Economic

Middle East Situation

Oil and Gold Prices Soar on Geopolitical Shock

The surprise escalation in Middle East tensions—marked by a large-scale Israeli strike on Iran—has sent immediate shockwaves through global commodity markets. In early Asian trading on June 13, Brent crude spiked by 12.2% to $77.77 per barrel, while WTI crude surged by 12.6% to $76.61. This marks one of the most significant intraday increases in recent months, driven by fears of supply disruptions in a region that remains critical to global energy flows.

Gold followed suit as investors rushed toward safe-haven assets. The precious metal climbed to nearly $3,425 per ounce, reaching its highest point in five months. This surge is fueled not only by geopolitical risk but also by growing speculation that the U.S. Federal Reserve may soon pivot toward interest rate cuts, which would enhance gold’s appeal in a low-yield environment.

Equities Sink Across Asia as Risk Sentiment Deteriorates

The equity markets reacted with immediate concern. Japan’s Nikkei 225 tumbled by 1.3% to 37,665.93 by late morning. Meanwhile, Hong Kong’s Hang Seng Index fell 0.8% to 23,848.26, and China’s Shanghai Composite slid to 3,376.40. This region-wide sell-off reflects heightened aversion to risk and the expectation that prolonged conflict could significantly disrupt supply chains and investor confidence.

Vietnam’s domestic stock market was not spared either. As of 10:45 a.m., the VN-Index dropped 5.68 points (0.43%) to 1,317.31, and the HNX-Index lost 1.51 points (0.66%) to 228.42, mirroring regional turbulence.

Hormuz Strait in Focus: Potential Macro Game-Changer

A key concern now centers around the Strait of Hormuz—a critical chokepoint responsible for approximately 20% of global oil shipments. According to SPI Asset Management’s Stephen Innes, if the strait is compromised, oil prices could spike to $90 per barrel or higher. JPMorgan has issued an even starker warning, suggesting that oil could breach $130 per barrel in the worst-case scenario involving a full-scale regional war.

The outcome hinges largely on Iran’s next move. A restrained response may allow markets to gradually recover. However, any retaliatory actions targeting Israeli or U.S. military bases in the region could escalate the crisis dramatically, potentially redefining the macroeconomic outlook for the remainder of 2025.

U.S. Role and Strategic Ambiguity

While the U.S. government has stated that it was not involved in Israel's strike, Iranian officials have warned that American military assets could become targets if a broader conflict unfolds. This raises the risk of secondary sanctions, proxy escalations, and renewed disruptions in energy markets—all of which could feed into inflationary pressures at a time when central banks, including the Fed, are contemplating easing cycles.

The convergence of geopolitical flashpoints, inflationary uncertainty, and monetary policy crossroads marks a volatile juncture for global markets. If tensions escalate, safe-haven assets like oil and gold are likely to outperform, while equities face sustained downside pressure. As the situation unfolds, investor attention will remain sharply focused on energy logistics, Fed rhetoric, and the geopolitical chessboard of the Middle East.