Market Outlook Summary

LONDON (Reuters) – Rising oil prices, Middle East tensions, a NATO meeting, and the U.S. Federal Reserve chief’s testimony are set to capture market attention in the coming days.

Here’s your heads up on the week in world markets from Alden Bentley in New York, Kevin Buckland in Tokyo, Amanda Cooper and Lucy Raitano in London, and Andrew Gray in Brussels.

1. Strait Up Worried

The Israel/Iran war has raised concerns about a potential oil supply shock. The U.S. recently targeted key Iranian nuclear sites, escalating worries. Brent crude surpassed $75, marking its first increase since January.

Currently, there are no output disruptions, with Iran producing approximately 3.3 million barrels daily and exporting about half. Although a decrease in Iranian exports could impact markets, other OPEC nations may compensate by utilizing spare capacity. A primary concern for markets is the possible blockage of the Strait of Hormuz, a critical passage for around 20% of daily crude supply, but analysts deem this unlikely. However, given recent market changes, volatility could increase.

2. Go Big

NATO aims to maintain Donald Trump’s approval, unify the alliance, and establish a significant new spending target in The Hague. The organization hopes the Israel-Iran issue doesn’t overshadow Wednesday’s summit, amidst Trump’s prior criticisms of NATO members over defense spending.

NATO chief Mark Rutte seeks to secure commitments from allies for a 5% GDP spending goal by broadening definitions of defense. This would raise the current target from 2% to 3.5%, while another 1.5% would focus on infrastructure adaptations for military use and cybersecurity. Spain is the only country publicly resisting this new target. With this shift in focus, Ukrainian President Volodymyr Zelenskiy might only receive an invite to the pre-summit dinner rather than the main meeting.

3. Next Question

Markets are looking for insights from Fed chair Jerome Powell regarding his perception of ‘meaningful’ inflation and its implications for interest rates during his upcoming testimony before Congress. Powell previously suggested that tariff impacts might influence goods price inflation.

He could also address how the potential escalation in the Middle East may affect inflation rates. The final first quarter GDP reading on Thursday is expected to confirm economic contraction. Additionally, the Personal Consumption Expenditures Price Index for May will be examined in light of the Fed’s decision to maintain rates, with anticipated rate cuts ahead.

4. Strong Bonds?

Japanese government bond yields recently surged due to investor concerns and the prime minister’s unfortunate comparison to Greece’s fiscal state. However, recent cooperative actions between the Bank of Japan and Ministry of Finance have changed the landscape dramatically.

The BOJ’s recent adjustments to bond tapering plans aim to stabilize yields. Tokyo’s consumer price index (CPI) report on June 27 will provide fresh insights into potential future rate adjustments amid broadening price pressures.

5. Holding Up?

Initial tariff impacts by U.S. President Trump resulted in increased business activity, but signs of a global recession are re-emerging. In the absence of clear company guidance, upcoming economic indicators hold significant importance for market trends.

The week will see the initial release of June’s business activity across various economies including the euro area, Britain, and the U.S. There are hopes for improved euro zone data following May’s PMI dip. Particularly troubling was the contraction of the services sector in the euro zone for the first time since November, and the UK services sector showed only modest growth in May.