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Stocks pressured by inflation and Iran tensions

US stocks fell sharply on Wednesday after US inflation accelerated to a three-year high and renewed US strikes against Iran kept oil prices elevated, clouding the outlook for interest rates and risk sentiment. European equities were more resilient, while Asian markets were mixed on Thursday, with gains in Japan and South Korea offset by weakness in Hong Kong and China. Oil moved higher as investors weighed the risk of a prolonged conflict in the Middle East. Attention now turns to the European Central Bank’s interest rate decision on Thursday.

  • Date
  • Author Shane Strowmatt, Senior Investment Writer
  • Reading time 5 minutes

Inflation shown with icons

US consumer prices rose 4.2% year-on-year in May, up from 3.8% in April, according to data released on Wednesday, while monthly inflation was unchanged at 0.5%, matching market expectations. Core inflation increased 2.9% from a year earlier and 0.2% from the previous month, compared with market forecasts for a slightly stronger monthly rise. Higher energy prices were the main driver, with the energy index climbing 3.9% on the month and accounting for more than 60% of April’s overall increase, while food prices rose modestly and real average hourly earnings fell 0.1%. The figures are likely to support market expectations that the Federal Reserve will keep interest rates unchanged at its June meeting as inflation remains well above target.

US stocks fall on Iran fears

US stocks fell sharply on Wednesday as the inflation backdrop and renewed threats by US President Donald Trump against Iran unsettled investors and pushed oil prices higher. The Nasdaq 100 dropped 2% to 28,508.03 points, while the S&P 500 lost 1.6% to 7266.99 and the Dow Jones Industrial Average fell 1.9% to 49,918.78. Semiconductor and AI shares led the decline, with Qualcomm, Broadcom and Super Micro posting particularly steep losses.

Oil climbs after US strikes

Oil prices continued to climb on Thursday after the US launched additional strikes against targets in Iran, raising concerns that the conflict could last longer and disrupt energy flows. US crude rose another 0.7% to USD 90.60 per barrel, while Brent gained 0.5% to USD 93.60. The US Dollar Index slipped slightly, while gold bounced back from a more than 5% slide on Wednesday, gaining about 0.7% early Thursday to trade near USD 4100 per ounce. US Treasury yields continued to climb, with the 2-year yield well above 4.1% and the 10-year yield higher than 4.5%.

European stocks resist US weakness

European equities were mixed on Wednesday and proved more resilient than US markets. The Euro Stoxx 50 fell 0.6%, while Switzerland’s SMI gained 0.8%, helped by defensive heavyweights including Nestlé. Food, beverage, telecoms, consumer goods and pharmaceutical shares outperformed, while miners, industrials, carmakers and technology stocks came under pressure.

Asian stocks pare early losses

Asian equities recovered from earlier declines on Thursday as the sell-off in technology shares eased, although investors remained cautious amid persistent tensions between the US and Iran. South Korea’s KOSPI rose 0.3% and Japan’s Nikkei 225 added 0.1%, while Hong Kong’s Hang Seng fell 1.1%, Australia’s ASX 200 was little changed and China’s CSI 300 dropped 0.6%. The rebound followed sharp recent losses in chipmakers and AI-related stocks, though sentiment stayed fragile as higher oil prices and strong US inflation data for May kept concerns about inflation and interest rates in focus.

Bank of Canada holds rates

The Bank of Canada kept its key policy rate unchanged at 2.25% on Wednesday, marking a fifth straight meeting without a move, as policymakers said there was little evidence that higher energy costs were feeding through into broader inflation. Governor Tiff Macklem said the Canadian economy was weak rather than in recession, even after output contracted from a year earlier in the first quarter and annual inflation rose to 2.8% in April. The central bank expects inflation to hover around 3% before gradually easing towards its 2% target, while warning it could still raise rates if energy-driven price pressures become more persistent. Markets continued to price in a possible quarter-point increase in December, although most economists expect rates to remain unchanged through the rest of the year.

Corporate and economic calendar

Corporate news in focus: Quarterly figures from Adobe and BMW.

Economic data in focus: European Central Bank interest rate decision (14:15), US Producer Price Index (14:30), US weekly initial jobless claims (14:30).

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.