Global Economy & Markets, Weekly Roundup 17/06/25
Middle East geopolitical risks have intensified, and investors’ cautiousness has increased ahead of the Federal Reserve’s upcoming meeting
Global equity markets traded sideways in the past week, with risk sentiment deteriorating after Israel launched a strike against Iran focusing on nuclear facilities (operation “Rising Lion”). Energy sector stocks substantially overperformed (MSCI ACWI Energy: +5.1% wow), as international oil prices surged by +12% wow to $74/barrel, on concerns for possible supply disruptions.
Government bond yields eased, somewhat more so in the US following also a lower than expected CPI inflation print for May (+2.4% year-over-year). The US Treasury 10-year yield decreased by -9 bps wow to 4.42% and its 2-year peer by -9 bps wow to 3.96%. As interest rate differentials versus euro area core sovereign bonds narrowed, the US Dollar depreciated to EUR/USD 1.1558, a 3½-year low.
Iran’s crude oil production of c. 3.3 million barrels per day, represents slightly above 3% of global supply. The manageability of a possible disruption in flows from Iran, is linked, inter alia, to OPEC+ policies, and especially of Saudi Arabia. Note that Saudi Arabia’s producers still operate well below capacity, with supply being voluntarily held down to c. 9 million barrels per day and spare capacity at its highest level in the past twenty years excluding the GFC and covid-19 crisis.
Right tail risk scenarios that could lead to significantly higher oil prices, depressing economic activity and risk asset pricing include: (i) a broadening of the conflict in the Middle East as the fighting between Isreal and Iran enters its fifth day and (ii) the disruption of oil and natural gas flows through the Strait of Hormuz (SoH). The SoH is located between Oman and Iran and is the primary export route for oil produced by Saudi Arabia, Kuwait, Qatar, Iran, Iran and the UAE, with circa 30% of world’s seaborne oil trade and 20% of global LNG exports (Qatar, UAE) moving through the SoH.
Geopolitical risks add another layer of complexity, on top of trade uncertainty, for central banks, inter alia as an increase in oil prices, if sustained, could have ramifications to the upside for inflation and to the downside for activity. Attention in the current week mostly turns on Wednesday June 18th to the FOMC meeting. The Fed is expected to stand pat at a range of 4.25% - 4.50%.
Attention will turn to the press conference, as well as the quarterly economic projections and the FOMC members’ assumptions for the appropriate path of monetary policy. In the previous round of projections (March), FOMC members’ median assumption called for an FFR of 3.75% - 4.00% at end-2025, implying two cuts of -25 bps each by then. Market implied expectations, according to FFR futures pricing, also point to cumulative rate cuts of -50 bps in the second half of 2025.
The Bank of Japan stood pat on June 17th (short-term rate of +0.50%), in view of an unclear international trade environment and a less benign outlook regarding economic momentum. The latter led the BoJ to a weaker guidance towards further rate hikes.
At the same time, the BoJ made modifications in its bond purchases drawdown plan. In July 2024, the BoJ has decided to reduce its JGB gross purchases (from circa ¥5.7 trillion per month) by -¥0.4 tn in each calendar quarter. As a result, the monthly pace of purchases has come down to ¥4.1 tn (0.7% of 2024 GDP). Today, the BoJ announced that the monthly pace of purchases will continue to be reduced by -¥0.4 tn each quarter up to Q1:2026 and will decelerate to -¥0.2tn in each calendar quarter later on, for the monthly pace to reach ¥2.1tn in Q1:2027.
Global equity markets traded sideways in the past week, with risk sentiment deteriorating after Israel launched a strike against Iran focusing on nuclear facilities (operation “Rising Lion”). Energy sector stocks substantially overperformed (MSCI ACWI Energy: +5.1% wow), as international oil prices surged by +12% wow to $74/barrel, on concerns for possible supply disruptions.
Government bond yields eased, somewhat more so in the US following also a lower than expected CPI inflation print for May (+2.4% year-over-year). The US Treasury 10-year yield decreased by -9 bps wow to 4.42% and its 2-year peer by -9 bps wow to 3.96%. As interest rate differentials versus euro area core sovereign bonds narrowed, the US Dollar depreciated to EUR/USD 1.1558, a 3½-year low.
Iran’s crude oil production of c. 3.3 million barrels per day, represents slightly above 3% of global supply. The manageability of a possible disruption in flows from Iran, is linked, inter alia, to OPEC+ policies, and especially of Saudi Arabia. Note that Saudi Arabia’s producers still operate well below capacity, with supply being voluntarily held down to c. 9 million barrels per day and spare capacity at its highest level in the past twenty years excluding the GFC and covid-19 crisis.
Right tail risk scenarios that could lead to significantly higher oil prices, depressing economic activity and risk asset pricing include: (i) a broadening of the conflict in the Middle East as the fighting between Isreal and Iran enters its fifth day and (ii) the disruption of oil and natural gas flows through the Strait of Hormuz (SoH). The SoH is located between Oman and Iran and is the primary export route for oil produced by Saudi Arabia, Kuwait, Qatar, Iran, Iran and the UAE, with circa 30% of world’s seaborne oil trade and 20% of global LNG exports (Qatar, UAE) moving through the SoH.
Geopolitical risks add another layer of complexity, on top of trade uncertainty, for central banks, inter alia as an increase in oil prices, if sustained, could have ramifications to the upside for inflation and to the downside for activity. Attention in the current week mostly turns on Wednesday June 18th to the FOMC meeting. The Fed is expected to stand pat at a range of 4.25% - 4.50%.
Attention will turn to the press conference, as well as the quarterly economic projections and the FOMC members’ assumptions for the appropriate path of monetary policy. In the previous round of projections (March), FOMC members’ median assumption called for an FFR of 3.75% - 4.00% at end-2025, implying two cuts of -25 bps each by then. Market implied expectations, according to FFR futures pricing, also point to cumulative rate cuts of -50 bps in the second half of 2025.
The Bank of Japan stood pat on June 17th (short-term rate of +0.50%), in view of an unclear international trade environment and a less benign outlook regarding economic momentum. The latter led the BoJ to a weaker guidance towards further rate hikes.
At the same time, the BoJ made modifications in its bond purchases drawdown plan. In July 2024, the BoJ has decided to reduce its JGB gross purchases (from circa ¥5.7 trillion per month) by -¥0.4 tn in each calendar quarter. As a result, the monthly pace of purchases has come down to ¥4.1 tn (0.7% of 2024 GDP). Today, the BoJ announced that the monthly pace of purchases will continue to be reduced by -¥0.4 tn each quarter up to Q1:2026 and will decelerate to -¥0.2tn in each calendar quarter later on, for the monthly pace to reach ¥2.1tn in Q1:2027.