Equities slide as US involvement in Iran looks more likely

by Joanne Wong and Jiyeun Lee

Equities declined as investors saw a growing likelihood of direct US involvement in Israel’s conflict with Iran, and Federal Reserve Chair Jerome Powell warned of meaningful inflation ahead.  

Europe’s Stoxx 600 index retreated 0.6%, putting the gauge on track for a third day of losses. A benchmark for Asian shares dropped more than 1%. US equities futures also fell, while the dollar strengthened against most major currencies. Cash trading in US stocks and Treasuries is closed for the Juneteenth holiday. 

Sentiment turned more cautious after Bloomberg reported that senior US officials are preparing for a possible strike on Iran in the coming days. Markets were already on edge after the Fed downgraded its estimates for growth this year and projected higher inflation, underscoring how tariff-driven uncertainties are complicating a bid to ease policy. 

“We’re cautious at the moment, we’re focusing on asset classes that are less correlated to rates, less correlated to what the US president is doing,” Gareth Nicholson, Nomura’s head of discretionary portfolio management, said on Bloomberg TV. “But there’s not many that are out there that are uncorrelated. So it’s an environment that I think, be more cautious makes sense.”

Trump has for days publicly mused about calling for a strike on Iran, which has been engaged in a war with Israel for nearly a week. He told reporters at the White House Wednesday that he prefers to make the “final decision one second before it’s due” because the situation in the Middle East is fluid.

The odds for the US to become involved are “quite high at this moment in time,” said Anna Rosenberg, head of geopolitics at Amundi Investment Institute.

“For the US, this is a moment to take out a big geopolitical headache, which is Iran potentially developing a nuclear weapon,” Rosenberg told Bloomberg TV. “Having said that, acting comes with a lot of consequences too. Trump will have to make a really difficult decision.”

In the first among a number of monetary policy decisions in Europe, the Swiss National Bank cut its interest rate to zero. Policymakers are seeking to deter investors from pushing up the franc, which has gained almost 10% against the dollar so far this year.

Later on Thursday, the Bank of England is likely to keep rates at 4.25% and signal it is sticking with its one-cut-every-other-meeting approach as officials try to strike a balance between elevated inflation, higher oil prices and a slowing economy. 

In commodities, oil prices swung as the market focused on the hostilities in the Middle East. Brent was above $77 a barrel after closing marginally higher on Wednesday, and West Texas Intermediate traded near $76. 

“Direct US involvement in an attack on Iran would almost certainly trigger a major spike in oil prices,” said Manish Bhargava, chief executive officer at Singapore-based Straits Investment. “This surge would aggravate global inflation, making central bank efforts — like the Fed’s — to control it more difficult and potentially delaying interest rate cuts.” 

Japanese bond yields fell across the curve after a strong auction result, and a report that the finance ministry is considering trimming its issuance of super-long bonds starting in July. 

On Wednesday, the Fed voted unanimously to hold its benchmark rate. Powell noted that increases in tariffs are likely to boost prices and added that the effects on inflation could be more persistent. While the median expectation for two rate cuts in 2025 didn’t change, a number of officials lowered their projections.  

“Powell played it safe,” said Haris Khurshid, chief investment officer at Karobaar Capital in Chicago. “They’re sticking to two cuts for now, but clearly rattled by tariffs. No urgency to move. It’s a tough spot: growth slowing, inflation lingering, and geopolitical risk heating up.”

Some of the main moves in markets:

Stocks

• The Stoxx Europe 600 fell 0.7% as of 8:47 a.m. London time
• S&P 500 futures fell 0.5%
• Nasdaq 100 futures fell 0.6%
• Futures on the Dow Jones Industrial Average fell 0.4%
• The MSCI Asia Pacific Index fell 1.3%
• The MSCI Emerging Markets Index fell 1.4%

Currencies

• The Bloomberg Dollar Spot Index rose 0.1%
• The euro fell 0.1% to $1.1468
• The Japanese yen fell 0.2% to 145.35 per dollar
• The offshore yuan was little changed at 7.1936 per dollar
• The British pound was little changed at $1.3412

Cryptocurrencies

• Bitcoin was little changed at $104,757.98
• Ether fell 0.2% to $2,523.48

Bonds

• The yield on 10-year Treasuries was little changed at 4.39%
• Germany’s 10-year yield advanced four basis points to 2.53%
• Britain’s 10-year yield advanced four basis points to 4.54%

Commodities

• Brent crude rose 0.9% to $77.40 a barrel
• Spot gold fell 0.1% to $3,365.44 an ounce

This story was produced with the assistance of Bloomberg Automation.

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