Global financial markets are in a state of uncertainty as geopolitical tensions escalate, while weak US economic data adds to investor anxiety, all ahead of a key monetary policy decision by the Federal Reserve (Fed).
Meanwhile, President Donald Trump's tough words demanding "unconditional surrender" from Iran and the possibility of direct US military intervention have forced investors to reassess the outlook for the global economy, which is now fraught with uncertainty.
Iran-US Tensions Shift From Rhetoric to Real Threat
Trump's latest statements on Tehran, combined with reports that Washington is holding a high-level national security meeting, have fueled speculation that the US may be more aggressive militarily.
This comes as the conflict between Israel and Iran enters its sixth day, raising concerns about greater regional tensions.
While demand for US Treasury bonds as a safe haven asset has been seen to increase intermittently, bond yields have started to rise slightly in Asia as traders reduce holdings ahead of the Fed meeting. Oil trade routes, particularly the Strait of Hormuz, which carries nearly 20% of global oil supplies, appear to be largely unaffected, but the situation is fraught with risks.
US Economy Shows Signs of Weakness, Market Confidence Hit
Some recent economic data from the US shows signs of growing weakness:
Retail sales (May): Down -0.2% month-on-month, a second consecutive month of decline. Tariff uncertainty and high household debt are weighing on consumer spending.
Industrial production: Down -0.3% month-on-month, reflecting slowing business activity and destocking.
Housing market sentiment: NAHB index falls to lowest level since December 2022, reflecting tighter lending conditions and increasingly cautious buyers.
The US economic growth engine is ‘stomping’. This could cause significant volatility in cyclical sectors, while bonds may continue to attract investor interest if the weak data continues.
Fed Expected to ‘Wait and See’, But Powell’s Tone to Decide
The Fed is expected to keep interest rates unchanged at its latest meeting early this morning, making it the fourth consecutive time that rates have been left unchanged. However, investors’ main focus will be on the interest rate projection (dot plot) and the tone of Fed Chairman Jerome Powell’s speech.
The market has now fully priced in a 25 basis point rate cut by October, but the probability of another cut before December is still below 50%.
Oil Market Remains Stable, But Highly Vulnerable
Crude oil prices have so far been trading in a range despite the escalating military conflict, with no supply disruptions so far. However, this situation is very risky.
Strategies for Traders:
Market Impact Theme
Geopolitical Tensions Extreme risks are rising. Maintain a hold on gold, energy and safe-haven currency pairs.
US Economy Weak Be careful of the US stock market, especially the consumer and industrial sectors.
Fed Communication Risks Prepare for price volatility during Powell’s press conference. The risk of a shock statement still exists.
Portfolio Investments Overweight defensive sectors, monitor bond yield demand, and maintain a flexible investment strategy.
Strategic View: Navigating in Ambiguity
Markets are now entering a phase where policy mistakes and geopolitical shocks can reinforce each other. The Fed faces a narrow path as inflation data slows, but global tensions could limit the room for policy easing.
Meanwhile, international investors are beginning to question the true resilience of the US economy.
Traders need to brace for big moves in interest rate, commodity, and currency markets. Passive strategies are no longer a wise risk management option, and active portfolio protection is essential in the current climate.
