Higher For Longer Spooks Markets, As Iran Peace Wobbles…

[00:00:00]Today, higher for longer spooks markets as Iran peace wobbles.

[00:00:16]Hello again, it's Martin North from Digital Finance Analytics, where I'm writing posts covering finance and probably news. This is our weekly market update where we start in the US, cross Europe and Asia, and then in Australia we cover commodities and crypto along the way. As expected, it was another volatile week as global shares dipped on Friday after US and Iranian negotiators called off peace talks. This came after the US and Iran signed a 14-point memorandum of understanding to end hostilities and to reopen the Straits of Hormuz. Friday's talks were set to be the first in a 60-day period of talks over Iran's nuclear ambitions as oil inventories fall towards critical levels. And in passing, note that the US Department of Defense needs roughly $80 billion to cover costs related to the Iran conflict as well as other spending priorities. That's according to a report in the Wall Street Journal.

[00:01:08]Recent gains in equities were supported by expectations of de-escalation, but stalled negotiations suggest the underlying issues remain unresolved.

[00:01:17]That leaves markets vulnerable to any deterioration sentiment heading into next week.

[00:01:23]Meantime, the risk of official Japanese intervention simmered as the yen traded on the brink of a 40-year low. The dollar headed towards its strongest weekly gain in a month, mostly at the expense of the yen, which has fallen for five out of the last six weeks. Trade closed to its weakest since late 1986 and prompting a volley of warnings from officials in Tokyo that intervention is an option.

[00:01:51]Now, they say Americans don't do irony, but Kevin Walsh, handpicked as the new chairman of the Federal Reserve by US President Donald Trump because he would bring down interest rates signal that the Fed will lift rates if that's what is required to bring inflation back under control. Now to be clear, the Fed kept rates on hold at between 3.5 and 3.75% and Walsh didn't directly say that rate rises were on the table but the closest he got to commentary was suggest that rate settings are even across the US economy. Rates feel restrictive in the housing sector he said but Walsh admitted that he would have a hard time managing to say those words if I were to see what's happening in financial markets.

[00:02:37]But under the Fed's new chair we got a sense of deja vu marking a return to stripped-down 1990s style central banking before this century's crisis put the Fed center stage in economic management and turned its leader into a consigliere in chief for Wall Street and Main Street alike.

[00:02:56]And he intends to meet that 2% inflation target and to put the Fed back in its box. Meanwhile, Walsh does not believe in providing forward guidance and the market quickly interpreted his resolve on inflation and the dot plot projections as a signal that the Fed will raise rates this year and possibly twice. Inflation has been too high for too long and the Fed faces two huge risks if it doesn't act. Six years of above target inflation means the credibility of the world's most important central bank is already fraying and the danger that inflation expectations becomes unanchored is rising by the day.

[00:03:33]Dollar index tracked around 13 months highs prompting traders to assume there will be at least one rate hike this year compared with a negligible possibility just a couple of weeks back.

[00:03:45]See my earlier show on the Walsh presser.

[00:03:50]The MSCI All World Index was down 0.15% on Friday having retreated after US Vice President J.D. Vance pulled out of a planned trip to meet Iranian negotiators in Switzerland on Friday. On the other hand, earlier the All Asia ex-Japan Index was up 3.58% on the earlier peace hopes. European stocks showed that the STOXX 600 fell 0.24% pairing earlier gains while the ASX 200 0.9% to 8,828 with six of the 11 sectors lower.

[00:04:26]US stock futures fell between 0.1 and 0.2% and the US stock market was closed on Friday for the Juneteenth holiday.

[00:04:35]Oil prices edged below $80 a barrel after Israel and Hezbollah agreed to a ceasefire in Lebanon on Friday according to an official from the US after an escalation in fighting there jeopardized the chances of an interim agreement on ending the war in Iran turning into a lasting Middle East peace deal.

[00:04:58]Some tankers appear to be getting through now, but for how long is the question. Both benchmarks lost nearly 10% this week and are trading near their lowest levels since early March.

[00:05:10]The US-Iran conflict began in late February of course. The shifting tone from the Fed hit Treasuries hard.

[00:05:17]Two-year yields were nearly 10 basis points higher than they were this week while benchmark 10-year yields sat at 4.488%.

[00:05:25]That reflects investors pricing in the chances of near-term rate rises.

[00:05:31]The S&P 500 closed down 1.2% on Thursday. That's the biggest market slump for a new Fed chair's first rate decision since 1994.

[00:05:42]Then Wall Street fell 1.45%.

[00:05:45]Even the seemingly impregnable SpaceX had a rough day falling 5% after a stunning first few days as a public company. The Nasdaq gained 1.9% on Thursday and led gains on Wall Street while the Philadelphia Semiconductor Index rose 6.4%.

[00:06:00]US President Donald Trump said iPhone maker Apple had agreed to work with Intel to design and manufacture chips in the US and Intel shares jumped 10.6%.

[00:06:11]With the market closed on Friday for the Juneteenth holiday marking the emancipation of enslaved black Americans, the S&P 500 showed a 0.93% weekly gain compared with the Nasdaq's 2.43% rise and the Dow's 0.17% increase.

[00:06:31]As the eyes of Wall Street were trained on Wall Street on Thursday, you might have missed one of the biggest ever disasters in private equity history as private equity firm Thoma Bravo handed software firm Medallia back to its lenders, which crystallized a $5 billion US dollar loss. That's the second biggest in the sector. Medallia's problem is, guess what? Too much debt in a world worried that software firms are being disrupted by artificial intelligence. This is a signal.

[00:07:05]And shares of Dutch semiconductor equipment maker ASML dipped in early European trading after US officials reportedly raised concerns about whether one of the company's most advanced chip-making machines may have ended up in China.

[00:07:20]ASML rejected the suggestion saying it has never shipped an EUV system to China and that none of the machines are located there.

[00:07:30]US gold futures fell another 1.65% across the week.

[00:07:35]European shares gave up early gains on Friday caught between a shaky Middle East truce, lingering anxiety over a hawkish Federal Reserve outlook and the uptick in oil.

[00:07:46]The pan-European stocks 600 swung into the red to trade 0.2% lower, while Germany's DAX was down 0.25% and France's CAC 40 last traded 0.4% lower.

[00:07:59]Europe's modest 0.6% weekly gain does look sluggish next to the over 1% rallies across Asia, dented by a surprise midweek hawkish turn from the Federal Reserve. Bank of America analysts warned that Europe's stock market rally may be running out of steam. The expectations embedded in the winners look excessive, according to Bank of America's analysts.

[00:08:25]British shares edged lower on Friday as a record public borrowing overshot and Andy Burnham's decisive parliamentary by-election win overshadowed strong unexpected retail sales data and unsettled investors already watching a fragile Middle East ceasefire unravel. Labour mayor Andy Burnham won a parliamentary seat and that clears a path to him ousting Prime Minister Keir Starmer. So, more Labour infighting ahead as Starmer's days do appear to be numbered. Meantime, public borrowing and interest expense ballooned in the latest figures, again showing the core issues in the UK economy. Public sector net borrowing hit 23.3 billion pounds in May. That's the second highest for any May on record and 5.6 billion pounds above the OBR's forecast. Debt interest payable surged to record 11.7 billion pounds. That's up 54.4% on a year earlier as index-linked gilt cost spiked on rising retail prices. Cumulative borrowing in the financial year to May now stands at a massive 46.3 billion pounds, running 7.7 billion pounds ahead of official predictions. Net debt has hit 95.1% of GDP levels that was last seen in the early 1960s. Slow growth, high debt, and weak labor markets, all of which helps to explain the Bank of England's hold rate decision this week.

[00:09:58]As inflation came in a little lower than feared, but retail sales volumes did rise. They were up 1.2% in May, and that beat forecasts of 0.5%, and it rebounded from 1% drop in April, according to the Office for National Statistics.

[00:10:12]Airline stocks such as Lufthansa, Air France KLM, and British Airways owner IAG all moved higher this week on those falling oil prices.

[00:10:22]Admiral Group fell more than 4% after RBC Capital Markets downgraded the British insurer to sector perform from outperform, and PPH E Hotel Group sank over 70% as the hotelier takeover proposal from Fattal had fallen through following opposition from a major shareholder.

[00:10:43]Sterling was trading higher at 1.3233, which is up 0.19%.

[00:10:51]Asian stocks fell on Friday amid some doubts over the upcoming peace talks between the US and Iran, while high-flying technology and chip-making shares reversed early gains to trade lower.

[00:11:01]Regional trading volumes are there were muted on account of holidays in China and Hong Kong.

[00:11:07]South Korea's Kospi logged sharp swings on Friday, initially hitting a record high of 9,385,000 before reversing course and trading down 0.6%.

[00:11:21]The index was hit chiefly by a reversal in major chip-making stocks which faced some profit-taking after a strong run this week. Samsung Electronics fell nearly 2%, while SK Hynix traded up 2% but retreated from record high earlier in the session.

[00:11:37]Hyundai Motors fell nearly 1% after local media reported the company planned to buy a remaining 9.65% in Boston Dynamics from SoftBank Group.

[00:11:48]While chip-making stocks had initially taken a strong lead in from Wall Street, this was seen fading amidst heightened uncertainty over the US Iran peace deal.

[00:11:58]The prospect of high US interest rates also weighed on technology shares after the Federal Reserve struck that much more hawkish tone.

[00:12:07]Japan's Nikkei 225 also retreated from a record high hit earlier in the session but traded up 0.2% and the TOPIX fell 0.9%.

[00:12:17]Japanese consumer price index data remained muted in May according to data released on Friday with core inflation remaining below the Bank of Japan's 2% annual target. CPI inflation remained at four-year lows amid continued subsidies from the Japanese government to temper the impact of high fuel and gas costs.

[00:12:37]The CPI print came after the Bank of Japan hiked interest rates earlier in the week and warned of more hikes in the face of sticky inflation. While CPI was quashed by government measures, producer price index data rose sharply in recent months, a trend which is likely to spill over into consumer prices eventually.

[00:13:00]Recent yen weakness may be driven in part by foreign investors hedging their exposure to Japanese equities rather than the deterioration in Japan's economy. That's according to Bank of America analysts. The report said Japan's balance of payments position has improved in recent years supported by stronger exports and rising inward investment. Despite these developments, the yen has continued to weaken against the dollar. Analysts argue that traditional capital flow data does not fully explain the currency's depreciation. Japanese stocks have significantly outperformed global markets over the past year, according to the report, that outperformance may have encouraged foreign investors to increase currency hedges on their Japanese equity positions, creating additional selling pressure on the yen. The report suggests that those hedging flows could amount to several trillion yen, and that may help to explain the gap between the yen's performance and the underlying balance of payments data. Now, according to the report, the yen could remain under pressure if Japanese equities continues to outperform global markets, but if that equity outperformance fades, hedging-related selling may ease, and the currency could then stabilize.

[00:14:14]Australian shares fell on Friday with BHP slumping to its biggest loss in more than a year after it warned of cost overruns at a flagship Canadian project.

[00:14:23]The SX200 declined 0.9% to 8,882, with six of the 11 sectors lower. The benchmark did hold on to the end of the week up 0.3% though.

[00:14:35]The big Australian eased 60 points on its own as it told investors that costs for its potash project in Canada would be at least 6.9 billion US dollars higher, a 42% increase above the original estimates. Shares in BHP fell 5.6% to $61.40, and its biggest one-day loss since April 2025, when it fell more than 6% following the fallout of US President Donald Trump's liberation day tariffs. The capex overrun at Jansen S1 and S2 raised questions about the returns and technical deliverability of BHP's organic strategy over the next five years, according to Barclays. This could see management attempting to execute four major growth projects simultaneously when it has been unable to manage the timeline and budget for one.

[00:15:29]Materials saw further losses with gold tumbling as a hawkish Federal Reserve and rate rise bet outweigh the signing of that interim peace deal between the US and Iran. Newmont dropped 6.7% to $243.47 and Evolution Mining fell 5.1% to $12.54.

[00:15:48]Alcoa dropped 6.9% $83.14 taking total losses since June the 3rd to about 30% amid choppy trade for aluminum.

[00:15:59]Investors instead switched to defensive stocks against the uncertain backdrop with CSL up 7.6% to $215.32.

[00:16:08]That's the biggest one-day gain since February 2022 when it then rose 8.5% while Coles rose 1.2% to $23.66 and 4D Medical rod 17.6% higher to $4.54 taking total gains in the past year above 1,650% Woodside Energy rose 1.4% to $21.03 on the Iran news.

[00:16:36]The banks were mixed with CBA up to $152.40 and NAB to $37.74 while ANZ slipped $35.03 and Westpac dropped to $35.01. Macquarie was last at $249.82.

[00:16:53]In company news, Electro Optical Systems surged 14.3% to $10.66 after it secured a $124 million US dollar contract to supply Slinger counter drone remote weapon systems to UAE defense firm Jen 5.

[00:17:09]Skycity Entertainment advanced 14.6% to 47 cents after it reached an agreement to pay $21 million for breaches in anti-money laundering and counter-terrorism laws at its Adelaide casino.

[00:17:23]And IDP Education surged 6.7% to $2.56 as it said adjusted earnings before interest and tax would be around $122 million for the 26 financial year compared to earlier guidance of between 120 and 130 million dollars.

[00:17:40]The Aussie was at 70.11 US cents and 53 UK pence while the two-year yield was up to 4.542% and the 10-year was up to 4.828% all of which screams higher for longer and suggests the RBA is likely to hike again in the months ahead and despite what some of the banking analysts are saying.

[00:18:02]Bitcoin hit weekly losses of 1.5% on Friday as some uncertainty over the US Iran peace talks and rising interest rates kept markets largely adverse towards cryptocurrencies. It was last 63,682.

[00:18:16]The world's largest crypto reversed a short-lived recovery after hawkish signals from the Federal Reserve dented appetite for risk-driven speculative assets. Most all coins also battered by this notion. Institutional investors dumped spot Bitcoin exchange-traded funds for a sixth consecutive week. And while the pace of capital outflows has been slowing from recent weeks, it still points to warnings that investors interest in crypto especially as investors sought more high-flying artificial intelligence stocks with clearer fundamentals.

[00:18:48]World number two crypto Ethereum fell 2.4% to 1,727 while XRP declined 2.3%.

[00:18:57]So all up, what you can see clearly is the expectation now is for higher rates for longer. And that'll flow through into financial markets, bonds of course, as well as mortgages.

[00:19:10]And this is going to put a lot of pressure on a lot of households and businesses around the globe.

[00:19:16]We are not going to see, I think, massive quantitative easing again, at least in the short term.

[00:19:22]And this is going to put a lot of more volatility into the markets. So, we can expect more of the same. Probably the on-and-off again conversations with Iran will continue. The question about oil supplies won't go away into the medium term.

[00:19:37]And more broadly, household pressures are continuing to rise as are inflation expectations.

[00:19:46]And central bankers around the world have to get to grips with controlling those expectations because if inflation continues to bubble higher, well, we know all hell is going to be let loose.

[00:19:58]I'm Martin North from Digital Finance Analytics. Many thanks for watching, and I'll see you again next time.

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