Israel-Iran conflict upends previously positive week for markets
Author: Ash Weston, Head of MPS, 8AM Global
Market Overview
As we were progressing through last week, I thought I might be writing the shortest edition of this weekly summary yet, essentially boiling down to “Inflation slightly lower than expectations – central banks positive, markets good”.
How quickly these narratives can change…
So let’s frame the week of two halves – we kicked off on Monday with (quiet) optimism in the air as positive noises emerged from the US-China discussion bunker. Mid-week, softer US inflation data reinforced hopes of a cooling Fed policy, which further supported equity prices – it was shaping up to be another week of potential all-time highs.
But Friday quickly slammed the door on the positive news front. News of Israel launching major airstrikes on Iran, followed by Iran’s swift retaliation, triggered a classic risk-off response: Brent crude shot up around 10–13%, stocks bowed under the pressure, and safe-havens like gold, the dollar, and treasury bonds surged. For investors in sterling-priced funds, NAVs had a double whammy of relative dollar strength and risk-off sentiment, denting client valuations over the week.
Israel-Iran
Clearly our role shouldn’t be to offer substantive commentary on this conflict, particularly as it’s a rapidly evolving situation that renders most conjecture moot. For context only – we’ve prepared a brief summary.
On Friday, Israel launched Operation Rising Lion, a major airstrike campaign targeting over 100 strategic sites within Iran—this included critical nuclear installations like the Natanz uranium-enrichment facility, missile launch infrastructure, and the residences of senior military and nuclear scientists. Israeli forces claim they eliminated top-ranking officials, including IRGC commander Hossein Salami and other key generals.
Responding swiftly, Iran retaliated with a barrage of over 100 ballistic missiles and drones aimed at Israel, primarily targeting military bases. Most were intercepted, with some impacting cities like Tel Aviv and Jerusalem, resulting in dozens of casualties and injuries. This marks a significant escalation, with both nations openly exchanging large-scale attacks. Aside from the most apparent effects on regional stability and overall market risk sentiment, the most likely areas to feel the impact over the short term are the oil and broad energy sectors due to heightened threats to critical shipping lanes like the Strait of Hormuz (20% of the global seaborne oil flow) and Iran’s Kharg Island (90% of its oil exports) and adjacent South Pars gas field.
US
The primary story in the US this week (and let us bask in the briefly clear waters of a ‘non-Trump’ headline) was a softer inflation story. May’s Consumer Price Index (CPI) rose just 0.1% month-over-month, half of the anticipated 0.2%. Core CPI, which excludes food and energy, also came in at 0.1%, well below the expected 0.3% rise. Annual CPI held steady at 2.4% and core inflation at 2.8%, aligning with forecasts.
On the Producer Price Index (PPI) front, final demand prices climbed only 0.1% in May, again undercutting expectations of around 0.2%–0.3%. Core PPI, excluding food and energy, also rose just 0.1%.
These surprisingly tame prints triggered a rally in Treasury bonds, with the 10-year yield dipping from 4.47 to approximately 4.41. Whilst there are a few different factors at play, in practice, anything that reinforces the odds of the Fed cutting (or at least not hiking) remains a key underpinning factor when ‘betting’ on the US.
At a sector level, energy stocks surged mid-week and again on Friday’s headlines, while defensives like utilities and staples held stronger during the sell-off. Tech gave up some mid-week gains, but overall, it wasn’t as hard-hit as cyclicals.
Europe & UK
What underpinned the mid-week strength before the wave of negative news on Friday? A mix of dovish news from the ECB, positive trade vibes, and a supportive UK budget announcement on Tuesday.
The FTSE did hit an all-time closing high of 8,884.92 on Thursday, just days after the ECB’s 25 bp rate cut had created a surge in European equity sentiment. On Friday, however, that rally reversed: the FTSE closed down about 0.4%, and our continental peers (DAX, CAC) dropped roughly 1.00%.
It’s worth noting that European equity funds got a small cushion as the euro weakened slightly against sterling…
Asia and Emerging Markets
Asia and Emerging Markets (EM) offered some relief mid-week, driven by the US-China trade talks and China’s continued steady recovery. South Korea ended the week up by over 6%, Taiwan gained 1.8%, and China 2.8%, pushing MSCI EM around +2.2% overall.
Japan’s Nikkei experienced a bit of a rollercoaster, with strong gains on Thursday, but ended the week flat. India’s Nifty broke below its range to test key support around 24,450–24,500 and ultimately closed the week down by just over 1%. Again, Friday’s Middle East escalation led to oil and gold rallying across the region while emerging market (EM) equities and currencies took a hit. UK investors exposed to Asia and emerging markets (EM) face mixed outcomes, with some gains partially offset by currency weakness, leaving sterling NAVs largely flat to negative.
Some client context: Seasonal summer softness equals a volatile VIX!
Entering June, markets typically experience what traders call the “summer doldrums”, a period of lower trading volumes and (usually) reduced volatility. This pattern often coincides with thinning liquidity as many market participants, including institutional investors and hedge funds, begin tapering activity for vacations and earnings season drawdowns.
My primary reason for mentioning any of this is primarily is to give a bit of context for clients, as the VIX jumped around 15% in one session (which is a lot over a very short period) and may well bleed into some misquoted stats in the “normal” papers – as they like to write things about “one of the biggest single-day moves” and the like…
Here is the VIX over the last 5 days reflecting the aforementioned ‘wedge’ of volatility coming down the track as we hit Friday’s headlines – certainly a bit spooky if taken out of context.
But this sudden reversal from market complacency just underscores how sensitive the summer equilibrium can be: low volume significantly amplifies the impact of headlines, leading to outsized moves in both direction and magnitude. Concerned clients should be reassured that whilst the news out of Iran is clearly deeply concerning, any market movements over the short term can be exaggerated in both directions and that (as we always say) context is key.
Here is the same chart over the last three months, including dear old ‘Liberation Day’, which dwarfs the scale of this recent spike (shown as the small tick-up at the end).
To add further context to this point, April’s highest volume (>2.4 million contracts) occurred during a high-liquidity, panic-driven event, reflecting broad institutional and retail engagement and occurred over several days and weeks.
This single 1.33 million contract trading day occurred amid thinner summer volumes (0.69 million the day before), making this volatility spike “technical” and headline-reactive rather than a true shift in risk sentiment.
In lay terms – this example highlights that volatility due to lower market volumes is essentially “doubled” at the moment. It doesn’t mean clients should ignore all bad headlines, but simply that all global political crises are not created equally (and that context is important).
This Week…
As we head into the coming week keep a close eye on:
- Fed meeting (17 June): No rate change expected, but the updated dot-plot and Chair Powell’s press conference could reshape expectations.
- ECB commentary & euro data: Post-cut communications will be scrutinised; Eurozone production figures may hint at next moves.
- Oil volatility: Any escalation or de-escalation in the Strait of Hormuz region could trigger sudden impacts on positions with energy or inflation sensitivity.
- UK data stream: GDP and jobs data mid-week could shift investor sentiment on domestic growth versus broader Gilt volatility.
- US sentiment and macro prints: Michigan Consumer Sentiment and other housing indicators could reinforce or challenge the disinflation narrative.
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