Investors see Quick Stock Market Drop if US Joins Israel-Iran Conflict

Political

Middle East Situation

Summary:

Turmoil in the Middle East comes as investors are already fretting about the effect of Trump's tariffs on the global economy.

Financial markets may be in for a "knee-jerk" selloff if the U.S. military attacks Iran, with economists warning that a dramatic rise in oil prices could damage a global economy already strained by President Donald Trump's tariffs.

Oil prices fell nearly 2% on Wednesday as investors weighed the chance of supply disruptions from the Israel-Iran conflict and potential direct U.S. involvement. The price of crude remains up almost 9% since Israel launched attacks against Iran last Friday in a bid to cripple its ability to produce nuclear weapons.

With major U.S. stock indexes trading near record highs despite uncertainty about Trump's trade policy, some investors worry that equities may be particularly vulnerable to sources of additional global uncertainty.

Chuck Carlson, chief executive officer at Horizon Investment Services, said U.S. stocks might initially sell off should Trump order the U.S. military to become more heavily involved in the Israel-Iran conflict, but that a faster escalation might also bring the situation to an end sooner. "I could see the initial knee-jerk would be, 'this is bad'," Carlson said. "I think it will bring things to a head quicker."

Wednesday's dip in crude, along with a modest 0.3% increase in the S&P 500, came after Trump declined to answer reporters' questions about whether the U.S. was planning to strike Iran but said Iran had proposed to come for talks at the White House. Adding to uncertainty, Iranian Supreme Leader Ayatollah Ali Khamenei rejected Trump's demand for unconditional surrender.

U.S. Treasury yields fell as concerns over the war in Iran boosted safe haven demand for the debt.

The U.S. military is also bolstering its presence in the region, Reuters reported, further stirring speculation about U.S. intervention that investors fear could widen the conflict in an area with critical energy resources, supply chains and infrastructure.

With investors viewing the dollar as a safe haven, it has gained around 1% against both the Japanese yen and Swiss franc since last Thursday. On Wednesday, the U.S. currency took a breather, edging fractionally lower against the yen and the franc.

“I don't think personally that we are going to join this war. I think Trump is going to do everything possible to avoid it. But if it can't be avoided, then initially that's going to be negative for the markets,” said Peter Cardillo, Chief Market Economist at Spartan Capital Securities in New York. "Gold would shoot up. Yields would probably come down lower and the dollar would probably rally."

Barclays warned that crude prices could rise to $85 per barrel if Iranian exports are reduced by half, and that prices could rise about $100 in the "worst case" scenario of a wider conflagration. Brent crude was last at about $76.

Citigroup economists warned in a note on Wednesday that materially higher oil prices "would be a negative supply shock for the global economy, lowering growth and boosting inflation—creating further challenges for central banks that are already trying to navigate the risks from tariffs."

Trump taking a "heavier hand" would not be a surprise to the market, mitigating any negative asset price reaction, Carlson said, while adding that he was still not convinced that the U.S. would take a heavier role.

Trades on the Polymarket betting website point to a 63% expectation of "U.S. military action against Iran before July", down from as much as an 82% likelihood on Tuesday, but still above a 35% chance before the conflict began last Friday.

The S&P 500 energy sector index has rallied over 2% in the past four sessions, lifted by a 3.8% gain in Exxon Mobil and 5% rally in Valero Energy. That compares to a 0.7% drop in the S&P 500 over the same period, reflecting investor concerns about the impact of higher oil prices on the economy, and about growing global uncertainty generated by the conflict.

Turmoil in the Middle East comes as investors are already fretting about the effect of Trump's tariffs on the global economy.

The World Bank last week slashed its global growth forecast for 2025 by four-tenths of a percentage point to 2.3%, saying that higher tariffs and heightened uncertainty posed a "significant headwind" for nearly all economies.

Defense stocks, already lifted by Russia's conflict with Ukraine, have made modest gains since Israel launched its attacks. The S&P 500 Aerospace and Defense index hit record highs early last week in the culmination of a rebound of over 30% from losses in the wake of Trump's April 2 "Liberation Day" tariff announcements.

Even after the latest geopolitical uncertainty, the S&P 500 remains just 2% below its February record high close.

"Investors want to be able to look past this, and until we see reasons to believe that this is going to be a much larger regional conflict with the U.S. perhaps getting involved and a high chance of escalating, you're going to see the market want to shrug this off as much as it can,” Osman Ali, global co-head of Quantitative Investment Strategies, said at an investor conference on Wednesday.

Source: Reuters

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Manuel

Stocks

Central Bank

U.S. stocks drifted to a mixed finish on Wednesday after the Federal Reserve indicated it may cut interest rates twice this year, though it’s far from certain about that.The S&P 500 finished nearly unchanged and edged down by less than 0.1 per cent after flipping between modest gains and losses several times. The Dow Jones Industrial Average dipped 44 points, or 0.1 per cent, and the Nasdaq composite rose 0.1 per cent.

Treasury yields also wavered but ultimately held relatively steady after the Fed released a set of projections showing the median official expects to cut the federal funds rate twice by the end of 2025.

That’s the same number they were projecting three months ago, and it helped calm worries a bit that inflation caused by President Donald Trump’s tariffs could tie the Fed’s hands.Cuts in rates would make mortgages, credit-card payments and other loans cheaper for U.S. households and businesses, which in turn could strengthen the overall economy.

But they could likewise fan inflation higher.So far, inflation has remained relatively tame, and it’s near the Fed’s target of 2 per cent. But economists have been warning it may take months to feel the effects of tariffs. And inflation has been feeling upward pressure recently from a spurt in oil prices because of Israel’s fighting with Iran.

Fed Chair Jerome Powell stressed on Wednesday that all the uncertainty surrounding tariffs means the median forecast for two cuts to interest rates this year could end up being far from reality. “Right now it’s just a forecast in a very foggy time,” he said Fed officials are waiting to see how big Trump’s tariffs will ultimately be, what they will affect and whether they will drive a one-time increase to inflation or something more dangerous.

There is also still deep uncertainty about how much tariffs will grind down on the economy’s growth. “Because the economy is still solid, we can take the time to actually see what’s going to happen,” Powell said.“We’ll make smarter and better decisions if we just wait a couple months or however long it takes to get a sense of really what is going to be the passthrough of inflation and what are going to be the effects on spending and hiring and all those things.”Adding to the uncertainty Wednesday were continued swings for oil prices.

After topping US$74 during the morning, the price for a barrel of benchmark U.S. oil dropped below US$72 before settling at US$75.14, up 0.4 per cent from the day before. Brent crude, the international standard, rose 0.3 per cent to US$76.70.

Oil prices have been yo-yoing for days because of rising and ebbing fears that the conflict between Israel and Iran could disrupt the global flow of crude. Not only is Iran a major producer of oil, it also sits on the narrow Strait of Hormuz, through which much of the world’s crude passes.

Trump said on Wednesday that Iran has reached out to him and that it’s not “too late” for Iran to give up its nuclear program, though he also declined to say whether the U.S. military would strike the country.“I may do it. I may not do it,” he said. “I mean, nobody knows what I’m going to do.”

On Wall Street, Nucor rose 3.3 per cent after the steelmaker said it expects to report growth in profit for all three of its operating groups in the second quarter. It said it benefited from higher selling prices at its sheet and plate mills, among other things.

All told, the S&P 500 fell 1.85 points to 5,980.87. The Dow Jones Industrial Average dipped 44.14 to 42,171.66, and the Nasdaq composite added 25.18 to 19,546.27.In the bond market,

Treasury yields held relatively steady following a few wavers up and down.The yield on the 10-year Treasury edged down to 4.38 per cent from 4.39 per cent late Tuesday.

The two-year Treasury yield, which more closely tracks expectations for what the Fed will do with its overnight interest rate, held at 3.94 per cent.
The moves followed a mixed set of reports on the U.S. economy released earlier in the day. One said fewer workers applied for unemployment benefits last week, which could be an indication of fewer layoffs.

But a second report said that homebuilders broke ground on fewer homes last month than economists expected. That could be a sign that higher mortgage rates are chilling the industry.In stock markets abroad, indexes were mixed across Europe and Asia.Tokyo’s Nikkei 225 rose 0.9 per cent, and Hong Kong’s Hang Seng fell 1.1 per cent for two of the bigger moves.

Source: AP

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Manuel

Cryptocurrency

The Federal Reserve left its key interest rate steady on June 18, choosing caution as it monitors persistent inflation and global uncertainties.

Bitcoin (BTC) remained largely stable, continuing to hold recent gains despite broader market jitters. The flagship crypto was trading at $104,110 as of press time, down 0.66% over the past 24 hours.

Rates maintained

The central bank’s Federal Open Market Committee announced it would maintain its policy rate within the current 4.25% to 4.5% target range, matching market expectations.

Policymakers emphasized that any future rate changes would depend on incoming economic data, citing healthy job growth and moderate progress on inflation as reasons to pause.

The total value of digital assets globally edged up to $3.23 trillion, reflecting cautious optimism among crypto traders who have kept a close watch on U.S. monetary policy.

Financial markets widely anticipated the Fed’s decision, especially with recent oil price increases adding new risks to inflation forecasts. Tensions in the Middle East, particularly between Israel and Iran, have also contributed to a more cautious economic outlook.

A survey from CME Group showed traders were almost certain, with a 99.9% probability, that the Fed would hold rates steady, despite repeated calls from the White House to push for a rate cut.

Trump calls for cuts

President Donald Trump intensified criticism of Fed Chair Jerome Powell on June 18, accusing him of damaging economic momentum by keeping borrowing costs too high.

Trump claimed that lowering rates by two percentage points would spur investment and support markets, contrasting U.S. policy with recent rate cuts by European central banks.

Even so, the Fed has signaled it intends to stay the course in its effort to bring inflation back in line with its 2% target, resisting political pressure amid a complex economic backdrop.

Bitcoin’s steady performance highlights how some investors continue to treat the token as a potential buffer against traditional market and policy shifts. However, geopolitical flashpoints and volatile commodity prices could test the crypto market’s relative calm in the months ahead.

Source: Cryptoslate

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Manuel

Political

Middle East Situation

President Donald Trump said Iran squandered the chance to make a deal over its nuclear enrichment, but declined to say whether the US plans to join Israel’s offensive aimed at destroying the program.

“I may do it. I may not do it,” Trump told reporters Wednesday at the White House when asked if he is moving closer to bombing Iran. “I mean, nobody knows what I’m going to do.”

Iran had been in negotiations with the US over its nuclear program for weeks, and had a further meeting scheduled, when Israel attacked Friday. The two Mideast nations have since traded missile strikes and escalating rhetoric — Israeli leaders threatening to topple the Islamic Republic, and their Iranian counterparts vowing defiance and retaliation — while the Trump administration weighs how deeply to get involved in its ally’s war.

Trump’s ambiguous comments add a new layer of tension to the deepening Israel-Iran clash. The president, who has campaigned for a decade in opposition to American wars in the Middle East, also faces a tense divide among his supporters over whether the US should enter the fray. America has so far limited its participation to helping Israel defend itself against Iranian missile and drone launches.

Trump said he encouraged Benjamin Netanyahu in a call Tuesday to “keep going” with his offensive operations, adding that he gave the Israeli premier no indication that US forces would participate in the attacks.

But the US is seen as being able to provide military firepower necessary to destroy Iran’s underground enrichment facility at Fordow, which analysts say Israel is unable to do alone. Iran has warned it can hit American bases across the region, where tens of thousands of troops are stationed, if the US joins the Israeli attack.

Trump didn’t close the door to a resumption of nuclear talks — he said Iran had sought a meeting, a claim Tehran disputed — but downplayed the likelihood they would bear fruit. “I said it’s very late to be talking,” the president said. “There’s a big difference between now and a week ago.”

The comments were Trump’s first substantive remarks since meeting Tuesday with his National Security Council, where the US’s options were discussed. He spoke to reporters on the South Lawn of the White House, where workers were installing a giant flagpole outside the executive mansion’s diplomatic entrance. Hours earlier he’d demanded “UNCONDITIONAL SURRENDER” from Iran in a social media post.

Since Israel’s strikes started, Iran has fired 400 ballistic missiles and hundreds of drones at Israel, killing 24 people and injuring more than 800, according to the Israeli government. At least 224 Iranians have been killed by Israel’s attacks. Iran has hit targets including a key oil refinery in the port of Haifa that was forced to shut down.

“The Americans should know that the Iranian nation is not one to surrender,” Iran’s Supreme Leader Ayatollah Ali Khamenei said in a statement published on his official website Wednesday. “Any military incursion by the United States will undoubtedly result in irreparable damage.”

Out of Patience

“Good luck,” Trump said when asked for his response. “We cannot let Iran get a nuclear weapon. I’ve been saying it for a long time. I mean it more now than I ever mentioned.”

Dennis Ross, who served as President Bill Clinton’s Middle East envoy and just returned from a trip to the region, said the Iranian regime is likely looking for an off-ramp from the current conflict despite the bellicose comments from Khamenei.

Its top priority is survival, followed by avoiding a direct conflict with the US, said Ross, who’s now a fellow at the Washington Institute for Near East Policy. “When they feel profoundly threatened, they will make concessions. They certainly feel vulnerable and threatened right now.”

Iran’s missile and drone launches against Israel appeared to be subsiding Wednesday evening, although the reason wasn’t immediately clear. While the Israeli army earlier said it had destroyed around one-third of Iran’s missile launchers, Tehran still possesses thousands of ballistic missiles that can reach Israel, National Security Adviser Tzachi Hanegbi said Monday.

US Ambassador to Israel Mike Huckabee announced Wednesday that the embassy is organizing evacuations of Americans in Israel who want to leave. Embassy personnel have already begun to depart the country, a spokesperson said. The announcements came a day after the US embassy in Jerusalem said it would be closed Wednesday through Friday.

Trump said the Iranian government had contacted the US about the conflict and even proposed a White House meeting to settle the matter, yet he said his patience with the Islamic Republic had “already run out.” Iran’s mission to the United Nations denied that claim in an X post Wednesday, saying “No Iranian official has ever asked to grovel at the gates of the White House.”

The question of whether to strike Iran has the potential to cause domestic political headaches for Trump, whose base is split between isolationists and traditional conservative interventionists. Supporters of both political parties oppose the US joining Israel’s attack on Iran by clear majorities, a YouGov survey found.

Trump said his bottom line remains that “Iran cannot have a nuclear weapon” and “it’s not a question of anything else.” During his first term, Trump withdrew from an agreement aimed at curtailing Iran’s atomic program, which the US and other world powers had spent years negotiating.

Republican hawks have been supportive of military action against Iran, but Trump has faced pressure from some of his isolationist supporters to take a more measured approach. “We have all been very vocal for days now urging, ‘Let’s be America First. Let’s stay out,” Representative Marjorie Taylor Greene said Tuesday on CNN.

During a breakfast Wednesday hosted by the Christian Science Monitor, longtime Trump ally Steve Bannon said Trump’s supporters want him to focus on issues most important to his base, like cracking down on immigration. But Bannon said that if the president has more information that backs the case for intervention “and makes that case to the American people, the MAGA movement will support President Trump.”

Defense Secretary Pete Hegseth, appearing before the Senate Armed Services Committee on Wednesday, declined to answer directly whether Trump had asked the Pentagon to provide options for striking Iran.

Hegseth said that “maximum force protection at all times is being maintained” for US troops stationed in the region, and said that “the president has options and is informed of what those options might be, and what the ramifications of those options might be.”

The US has continued building its military presence in the region. The USS Ford carrier strike group is set to depart next week on a regularly scheduled deployment, initially in the European theater, according to a US official.

Meanwhile, the head of the International Atomic Energy Agency said the location of Iran’s near-bomb-grade stockpile of enriched uranium cannot currently be verified.

IAEA Director General Rafael Mariano Grossi said Wednesday the whereabouts of the material are now unclear, given Tehran warned him the stockpile could be moved in the event of an Israeli attack. The agency continues to see no indication of significant damage to Iran’s Fordow nuclear site, he added.

Source: Bloomberg

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Manuel

Central Bank

Economic

The Federal Reserve's latest "dot plot" outlining future interest rate moves suggests the central bank will still cut rates twice this year, unchanged from its March outlook, though June's forecast shows a more divided Fed weighing its next move on interest rates.

The Fed announced Wednesday that it held its benchmark interest rate in a range of 4.25%-4.5%, as expected. This marked the fourth straight meeting the Fed kept rates unchanged since cutting rates by 0.25% back in December.

Along with its policy announcement, the Fed released updated economic forecasts in its Summary of Economic Projections (SEP), including its "dot plot," which maps out policymakers' expectations for where interest rates could be headed in the future.

The central bank raised its projections for inflation and unemployment at the end of this year while lowering its forecast for economic growth.

Fed officials see the fed funds rate falling to 3.9% this year, on par with its previous March projection. Coming into the decision, markets had priced in one to two additional rate cuts this year, according to Bloomberg data. The central bank slashed interest rates by a total of 100 basis points in 2024. It has yet to deliver rate cuts so far this year.

In 2026, officials see one additional cut; in March, the Fed expected to cut rates twice next year.

Twelve officials predict a rate cut this year, with two officials seeing a decrease of more than 0.5%.

Most notable in Wednesday's dot plot were forecasts that showed seven FOMC members see no change in rates this year, signaling a more hawkish stance compared to March when four officials saw no change. Two FOMC members expect only one interest rate cut this year.

The updated forecasts suggest the Federal Reserve will continue to take a cautious approach as officials attempt to understand the Trump administration's shifting trade narrativeand other policy unknowns, such as the implications of the president's tax proposal.

Meanwhile, fears over stagflation, a bleak economic scenario in which growth stalls, inflation persists, and unemployment rises, have escalated since the start of the year — and Wednesday's projections continued to underscore that sentiment.

The SEP indicated the Federal Reserve sees core inflation hitting 3.1% this year, higher than March's projection of 2.8%, before cooling to 2.4% in 2026 and 2.1% in 2027.

The Fed also sees the unemployment rate rising to 4.5% this year, higher than its previous forecast of 4.4%. As of May, the unemployment rate stood at 4.2%. Unemployment is expected to remain at that level — 4.5% — through 2026 before ticking down to 4.4% in 2027.

The Fed also downgraded its previous forecast for US economic growth, with GDP expected to grow at an annualized pace of 1.4% this year before reaching 1.6% growth in 2026 and 1.8% in 2027.

In March, officials saw GDP growth at 1.7% this year before reaching 1.8% in 2026 and 2027.

Source: Yahoo Finance

To stay updated on all economic events of today, please check out our Economic calendar

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Thomas

Central Bank

The Federal Reserve held interest rates steady on Wednesday and policymakers signaled borrowing costs are still likely to fall this year, but slowed the overall pace of expected future rate cuts in the face of estimated higher inflation flowing from the Trump administration's tariff plans.

In new economic projections, policymakers sketched a modestly stagflationary picture of the U.S. economy, with economic growth slowing to 1.4% this year, unemployment rising to 4.5% by the end of this year, and inflation finishing 2025 at 3%, well above the current level.

While policymakers still anticipate cutting rates by half a percentage point this year, as they projected in March and December, they slightly slowed the pace from there to a single quarter-percentage-point cut in each of 2026 and 2027 in a protracted fight to return inflation to the central bank's 2% target.

Under the new projections, inflation remains elevated at 2.4% through 2026 before falling to 2.1% in 2027 amid largely stable unemployment.

"Uncertainty about the economic outlook has diminished but remains elevated," the Fed said in its latest policy statement, a modification of language used in May, at a more turbulent moment in the trade debate, when it said that the risk of both higher inflation and higher unemployment had risen.

Those outcomes were both embedded in the new projections, the Fed's latest thinking about how President Donald Trump's suite of economic policies is expected to shape the economy this year.

The 1.4% growth in output this year compares to the 1.7% rate seen in the last round of projections in March, and the 4.5% unemployment rate expected at the end of the year is up from the 4.4% projected in March. The rate as of May was 4.2%

So far, however, "the unemployment rate remains low, and labor market conditions remain solid," the Fed said in its policy statement, which was approved unanimously.

It did not mention the sudden outbreak of hostilities between Israel and Iran and the risk that conflict posed to global oil or other markets.

Fed Chair Jerome Powell is scheduled to hold a press conference at 2:30 pm EDT (1830 GMT) and is likely to speak on the issue, as well as elaborate on the central bank's latest statement and economic projections.

The rate projections from Fed officials for this year at least are in line with recent market expectations for a quarter-percentage-point rate reduction as soon as the Fed's September 16-17 meeting. The central bank continues to ignore Trump's call for immediate rate cuts, a move Fed officials feel would be counter to their effort to ensure inflation returns to their 2% target until key tariff changes are finalized and their effects are better understood.

As Fed officials were meeting on Wednesday, Trump called Powell "stupid" and said the policy rate should be slashed in half, the type of move usually reserved for severe economic emergencies.

The Fed's current policy rate was set in the current 4.25%-4.50% range in December, and policymakers have been reluctant to commit to a timeline for further cuts given the volatility of U.S. trade policy, and the difficulty of estimating how the burden of higher import taxes will be spread among consumers, importers, and producing nations.

Source: Reuters

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Adam

Economic

Rising unemployment will likely be what pulls the trigger for the Federal Reserve to finally begin lowering interest rates again, economists say.

Since January, the Fed has stood on the sidelines, keeping its benchmark lending rate unchanged at about 4.4%. Officials have said in recent speeches that they want to see how President Donald Trump’s significant policy changes, including on tariffs, affect the US economy first before considering further rate cuts.

Renewed tensions in the Middle East add even more to the uncertainty that has paralyzed the central bank. Officials are expected to continue with their strategy of staying on hold at the conclusion of their two-day policy meeting on Wednesday, with an announcement at 2 p.m. ET.

But the economy could soon buckle as Trump’s tariffs begin to force shoppers to pull back on their spending, eventually sending unemployment higher as company profits take a hit. That would give the Fed, which is responsible for preserving the labor market’s strength, the signal to start lowering rates.

New economic projections from Fed policymakers could show they expect to lower rates at least once this year — and it will likely be because of bad news, economists say.

“The Fed will probably start to cut rates in the second half of the year as the tariffs start to weigh on growth and you see the unemployment rate coming up,” Jay Bryson, chief economist at Wells Fargo, told CNN.

While the Fed will likely lower rates eventually, the Fed’s expected decision on Wednesday might not sit well with Trump, who has torn into Fed Chair Jerome Powell for not lowering borrowing costs already, describing the Fed leader as a “fool” and a “numbskull.”

The bigger worry

In April after Trump unveiled a massive tariff hike on dozens of countries, Powell predicted the Fed could be in a situation in which both of the US central bank’s goals — stable prices and maximum employment — are “in tension.”

A stagnant economy combined with rising inflation is referred to as “stagflation,” which isn’t happening outright, but forecasts from most economists, in addition to Fed officials themselves, show the US economy is trending in that direction. Officials’ new projections, to be released Wednesday, will likely show they still expect stagflation to slowly take shape this year.

Such a situation puts the Fed in a difficult situation, and Powell has said how the Fed responds depends on which variable is in a worse state. The bigger worry for the Fed may end up being with the labor market.

“The steady unemployment rate notwithstanding, cracks are becoming more evident in the labor market,” Jim Baird, chief investment officer at Plante Moran Financial Advisors, wrote in a recent analyst note. “Job openings are down, job creation has slowed, and unemployment claims continue to edge higher.”

Fed officials have signaled that they will step in by lowering rates if the labor market shows concerning signs of strain.

Trump ramps up the pressure on the Fed

For months, Trump has lambasted the Fed and Powell himself for not lowering borrowing costs quickly enough.

Trump has said the Fed is lagging behind its European counterpart and has claimed, without evidence, that the reason Powell is not lowering rates is to help Democrats. (The Fed is an independent agency whose decisions on monetary policy are free of political interference.) Trump has also said the Fed ought to lower rates to reduce the federal government’s interest payments on its massive budget deficits, which are expected to grow even larger if Congress passes the president’s tax and spending bill.

“We’re going to spend $600 billion a year, $600 billion because of one numbskull that sits here (and says), ‘I don’t see enough reason to cut the rates now,’” Trump said at the White House last week.

However, Fed officials don’t consider the government’s finances when setting rates. They focus on achieving their so-called dual mandate of stable prices and maximum employment.

Other administration officials have piled on to the criticism of the Fed recently.

“It’s unbelievable how much we would save if [Powell] did his job and he cut interest rates,” Commerce Secretary Howard Lutnick told Fox News last week. “Come on. He’s got to do his job soon.”

Last week, Vice President JD Vance accused the Fed of deliberate misconduct for not lowering borrowing costs, writing in a post on X that the Fed is engaged in “monetary malpractice.”