Market is split between a hawkish Fed and geopolitics

Markets concluded last week on a volatile note, with global geopolitical developments and shifts in Federal Reserve policy taking center stage. The week began with bullish momentum, supported by optimism stemming from the finalized US-Iran peace memorandum, which alleviated some risk-off pressures. However, this positive sentiment waned in the latter half of the week as the Federal Reserve’s hawkish dot plot dominated market attention.

Monetary Policy Shifts

Central banks in major economies held interest rates steady last week as they continue to evaluate the implications of the ongoing Middle East conflict. Market expectations for rate cuts have diminished, with the narrative shifting back to monetary policy following a more hawkish-than-anticipated Federal Reserve meeting. The Fed signaled a possible rate hike this year, with nine of eighteen policymakers now forecasting at least one increase, compared to none in March. Six of those nine anticipate multiple 25-basis-point hikes. As a result, markets are no longer pricing in rate cuts but are instead factoring in the tail risk of a potential rate increase.

Geopolitical Developments Drive Markets

A tentative US-Iran peace deal contributed to improved market sentiment by raising hopes for the resumption of shipping through the Strait of Hormuz. Nonetheless, investors remain cautious, awaiting clarity on the timeline and terms of any final agreement. Early Monday, Iran announced the closure of the Strait of Hormuz as a pressure tactic against the United States. While US-Iran negotiations concluded constructively in Switzerland, technical discussions are set to continue this week following comments from US President Donald Trump that threatened to stall progress.

Any breakthrough or escalation in these talks could have significant implications for global risk sentiment. The resumption of tanker traffic through the Strait of Hormuz will be a significant focus following the agreement between the US and Iran to lift the naval blockades.

Summary

Although geopolitical tensions have eased somewhat and discussions around a formal US-Iran agreement are ongoing, elevated rate hike expectations continue to weigh on risk assets. As the new trading week progresses, market movements are expected to be driven more by geopolitical developments and shifts in central bank policies than by domestic factors. Nonetheless, investors continue to closely monitor the Federal Reserve’s preferred inflation gauge, the May Personal Consumption Expenditures (PCE) report, which is anticipated to indicate a modest acceleration in core inflation.

 

 

 

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