Global Markets Stay Cautious Amid Middle East Tensions

By Naomi Rovnick and Rae Wee
LONDON, SINGAPORE (Reuters) – Global markets traded cautiously on Wednesday due to escalating Middle East hostilities and uncertainty ahead of the Federal Reserve’s monetary policy decision later in the day, prompting investors to hold back on new stock market and currency bets.

As traders assessed the impact of Israel’s ongoing air strikes on Iran, now entering their sixth day, global economic and financial market outlook remained uncertain. European stock indices and international oil prices exhibited little direction, trading flat overall.

The UK’s FTSE 100 edged 0.2% higher, while Germany’s DAX also increased by the same amount. Brent crude oil prices fell 0.8% to $75.92 a barrel, though still on track for a 1.6% weekly rise.

Reports emerged that thousands of Tehran residents have fled as Israel targets Iranian leader Ayatollah Ali Khamenei’s inner circle. The situation escalated with Iranian counter-attacks reported and the U.S. deployment of additional fighter jets to the region.

Israel’s largest air strike on Iran has raised concerns over potential supply disruptions in the Strait of Hormuz, crucial for oil transport, while rising oil prices could exacerbate inflation globally, particularly with existing U.S. tariffs.

Investor anxiety has grown around potential U.S. military involvement, especially following President Donald Trump’s recent calls for Iran’s strikingly unconditional surrender, indicating a grave risk of direct confrontation.

Joseph Capurso of Commonwealth Bank of Australia noted that ongoing tensions signal unresolved Middle Eastern issues and heightening risks of military intervention, as oil price fluctuations reflect market sentiments regarding potential disruptions.

U.S. equity futures maintained a steady course, featuring slight gains from S&P 500 and Nasdaq 100 contracts after a down day on Wall Street. In currency markets, the dollar retained most of its recent gains, attributed to the U.S. being an energy exporter. However, rising oil prices pose risks to consumer spending and inflation in import-reliant regions like the eurozone and Japan.

The euro continued to struggle from a prior 0.7% drop, trading at $1.1535, while sterling rose 0.2% to $1.3458 after a previous decline. The yen appreciated slightly to 1.4498 per dollar.

Macquarie Group’s Thierry Wizman remarked that geopolitical conflicts vindicate the U.S. dollar’s safe-haven status under certain conditions, notably disruptions in oil supply.

Fed’s Economic Policy Decision

The volatility in the Middle East, coupled with unsettled Trump tariffs and indications of weakness within the U.S. economy, creates complexities ahead of the Federal Reserve’s decision later in the day.

U.S. retail sales unexpectedly fell by 0.9% in May, the largest decrease in four months. Market expectations lean towards the Fed maintaining current rates, but significant attention will be paid to updated economic and interest rate projections released in the dot plot.

Harvey Bradley of Insight Investment commented, “Markets will watch the Fed’s dot plot for indications on how and when the central bank might begin a cutting cycle.” He acknowledged the possibility of one rate cut this year if Middle Eastern tensions intensified inflation.

Steady U.S. Treasury yields followed a previous drop as investors sought safe-haven bonds. The benchmark 10-year yield is slightly up at 4.4027%, while the two-year yield remains stable at 3.9586%.

In commodities, spot gold remained unchanged at $3,386 an ounce.