6/13/25: Geopolitical Conflicts Shakes Markets

This week, Israel’s launch of Operation Rising Lion, a major military action against Iranian nuclear and military facilities, marked a significant escalation in Middle East tensions and raised concerns across global financial markets. The operation, described by Israeli officials as a preemptive move to address national security concerns, targeted sites related to Iran’s nuclear program and resulted in the deaths of several senior Iranian officials. In response, authorities in Tehran have vowed strong retaliation.

Markets responded with heightened volatility on Friday as investors moved out of risk assets. The S&P 500 is down about 1% this morning. Oil prices spiked as much as 13% overnight, briefly topping $77 per barrel before retreating to $72, as traders weighed the risk of supply disruptions. Gold prices have surged nearly 4% to a two-month high of $3,453 per ounce, while the US dollar has strengthened as investors seek safety. Earlier in the week, before this bout of volatility, US Treasury auctions for both the 10-year and 30-year bonds saw robust demand, with solid investor interest despite the looming uncertainty. These developments highlight how rapidly geopolitical events and shifting sentiment can impact financial markets.

Beyond geopolitics, economic data also helped shape sentiment this week. Both the Consumer Price Index and Producer Price Index pointed to moderate inflation, easing some concerns about persistent price pressures. Meanwhile, the latest University of Michigan survey reported a modest rise in consumer sentiment for June, suggesting a slight improvement in confidence. Taken together, these trends reinforced expectations that the Federal Reserve can remain patient and increased the likelihood of a rate cut in the second half of 2025 if inflation and growth continue to slow.

Looking ahead, the Federal Reserve’s next policy meeting is set for June 17 and 18, with an announcement on Wednesday. The Fed is widely expected to keep the federal funds rate unchanged at 4.25% to 4.50%, as economic data remains solid, but the outlook is clouded by uncertainty around tariffs and fiscal policy. Markets will focus on updated projections, the dot plot, and Chair Powell’s press conference for clues on future policy direction and the timing of potential rate cuts. Chandler expects rate cuts to come later in 2025, given the Fed’s caution related to tariffs and the broader economic outlook.

Next week:  Empire Manufacturing, Retail Sales, Industrial Production, Capacity Utilization, NAHB Housing Market Index, Housing Starts, Building Permits, Federal Open Market Committee Meeting (FOMC), Philadelphia Fed Business Outlook, Leading Economic Index.

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