Investor jitters as conflict escalates
Geopolitical turmoil dominated global markets last week, as Iran’s missile retaliation against Israel sparked widespread volatility. The Middle East conflict disrupted investor confidence, prompting a sharp sell-off across equity markets and renewed interest in defensive assets.
Global market reaction – Safe-haven rally and sector shifts
The recent escalation in conflict in the Middle East led to sharp moves across global financial markets. Equities declined while defensive assets gained, with sector-specific impacts reflecting broader investor caution.
U.S. equities and sector impacts
In the U.S., markets saw broad declines with the Dow Jones Industrial Average falling approximately 1.8%, the S&P 500 declining over 1%, and the Nasdaq dropping 1.3%. Investors turned to traditional safe havens, sending oil prices surging by 5% to 7%.
Defence-related stocks like Lockheed Martin and Northrop Grumman outperformed, while airlines and other fuel-sensitive sectors came under pressure. Technology stocks were mixed: Adobe fell by more than 5% despite raising its annual revenue forecast, amid concerns over the speed of AI integration. In contrast, Oracle rose over 7.5% to a record high, reflecting investor optimism about its AI-driven growth potential.
European and asian equities follow suit
In Europe, the STOXX 50 and STOXX 600 dropped 1.4% and 1%, respectively, on Friday. For the week, the STOXX 50 was down 2.6% and the STOXX 600 lost 1.7%. Automakers like Stellantis, Ferrari, Mercedes-Benz, and BMW led declines. Conversely, energy and defence firms such as Shell, Eni, RWE, Rheinmetall, and Thales outperformed on rising oil prices.
Asian equities were mostly flat. Chinese shares stagnated as strong retail data was offset by weak industrial output. Japanese and South Korean markets saw modest gains, supported by stable domestic conditions.
Macro outlook – U.S. economy shows resilience
Despite geopolitical uncertainty, U.S. economic fundamentals remain strong. The following sections explore the underlying drivers of this resilience.
Growth and inflation dynamics
After a softer first quarter, primarily due to inventory distortions, economic growth is regaining momentum. Second-quarter GDP is forecast to exceed 3%. Consumer spending remains healthy, supported by a resilient labour market, low unemployment (around 4.2%), and real wage growth.
Inflation has cooled notably. In May, headline CPI came in at 2.4% and PPI at 2.6%, well below 2022 peaks. These trends may allow the Federal Reserve to cut rates in late 2025, especially if broader economic conditions soften.
Trade and policy developments
Trade-related anxiety has eased somewhat, with progress in U.S.-China trade talks and potential extensions of tariff pauses with other key partners. While some inflationary risks from tariffs persist, the services-driven U.S. economy limits broader exposure. Analysts see recent market weakness as a potential buying opportunity for long-term investors.
Key equity movers – Headlines and highlights
Several companies made headlines last week due to executive moves, analyst actions, and major product developments. Here’s a summary of the most notable equity moves.
Company announcements and analyst calls
- Renault CEO Luca de Meo is reportedly stepping down in mid-July to join Kering as CEO, replacing François-Henri Pinault, who remains chairman.
- Visa and Mastercard shares fell by about 5% on Friday amid reports that Walmart, Amazon, and other retailers are exploring stablecoin issuance, pending passage of the Genius Act.
- Adobe dropped 7% post-earnings due to concerns about the pace of AI monetisation, despite raising its full-year revenue outlook.
- Deutsche Telekom and Nvidia announced a joint plan to build a European AI cloud infrastructure by 2026, supported by EU and German subsidies.
- Novo Nordisk regained its title as Europe’s most valuable public company, with a market cap of $365 billion, surpassing SAP. The rally followed strong weight-loss drug trial results and investment from Parvus Asset Management.
- Oracle received an Outperform rating from BMO Capital Markets, with a price target raised to $235, citing robust software and cloud revenue growth.
- GE Vernova was downgraded by Wolfe Research, following a 50% YTD stock rise and valuation concerns, despite long-term growth prospects.
- McDonald’s was downgraded to Hold by Argus Research, citing slowing traffic and consumer resistance to price hikes.
- Linde was initiated as Outperform by RBC Capital Markets, with a $576 target, driven by strong pricing power and a $10.4 billion project backlog.
Economic events to watch – A critical week ahead
Markets are set for an eventful week with key economic indicators and policy decisions likely to sway sentiment.
What’s on the radar?
Early in the week, the release of the New York Empire State Manufacturing Index and the OPEC Monthly Report will offer clues on economic momentum and energy dynamics.
Later, investors will focus on the Federal Reserve’s policy meeting, U.S. retail sales data, and ongoing trade updates—all of which could impact the direction of the recent equity rally.
Currency & commodities – Oil soars, Dollar gains strength
Geopolitical uncertainty continues to drive major movements in commodity and currency markets, especially crude oil and the U.S. dollar.
Oil and Dollar react to risk-off sentiment
Oil prices rose again in Asian trading amid concerns over supply disruptions in the Middle East. While Brent and WTI futures remain below Friday’s four-and-a-half-month highs, they continue to trend upward.
The U.S. dollar index edged up to 98.3, buoyed by safe-haven flows, while the euro fell to 1.1534, as markets reconsider the timing of Federal Reserve rate cuts due to inflation concerns.
Looking ahead
While the latest surge in geopolitical tensions has disrupted market sentiment, the underlying economic data, particularly in the U.S., offers a more balanced outlook. With key financial indicators and policy decisions on the horizon, investors may find opportunity amid current volatility, especially if the conflict remains geographically contained.
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