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Fed monetary policy decision in focus, while markets monitor geopolitical tensions

The Federal Open Market Committee (FOMC) will announce its policy decision tonight and Fed Chair Jerome Powell will deliver the central bank’s latest economic projections. Meanwhile, the escalation of the conflict between Israel and Iran continues to cloud market sentiment worldwide. Stock markets in New York and in the Asia-Pacific region mostly declined amid the Fed’s upcoming decision and geopolitical concerns, and European markets are expected to open lower today.

  • Data
  • Autore Alessandro Fezzi, LGT Research Content & Publications
  • Tempo di lettura 5 minuto

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The Federal Reserve is anticipated to keep its benchmark interest rate unchanged during its policy meeting tonight (20:00 CET), maintaining its cautious approach amidst economic uncertainties and the latest geopolitical tensions. The Fed remains concerned about the potential inflationary impact of US President Trump's tariffs. Markets are nearly unanimous in expecting no rate change, as policymakers opt to assess the economy's response to current conditions before making further adjustments.

Stock indices on Wall Street decline amid Middle East escalation 

US equity markets faced losses on Tuesday as continued tensions between Israel and Iran, coupled with uncertainty surrounding US President Donald Trump's response, weighed on investor sentiment. The Dow Jones Industrial fell 0.7% to 42,215.80 points, while the S&P 500 and Nasdaq 100 dropped 0.8% and 1%, respectively. Safe-haven assets like US Treasury bonds and the US dollar gained as investors shifted away from riskier stocks. Weak US economic data, including disappointing retail sales and industrial production figures for May, added to market concerns. Solar stocks plummeted by up to 40% following a Senate proposal to phase out renewable energy subsidies, while pharmaceutical shares declined on reports of potential restrictions on drug advertising.

US retail sales drop sharply in May

Retail sales in the US fell by 0.9% in May compared to the previous month, according to data released by the Commerce Department on Tuesday. This marks the largest decline since the start of the year and exceeds economists' expectations of a 0.6% drop. Sales in April were also revised downward to a 0.1% decrease, from an initially reported 0.1% increase. The decline was driven by reduced revenues from building materials and automobiles, with vehicle sales particularly impacted by newly introduced tariffs. Excluding volatile vehicle sales, retail sales fell by 0.3%, contrary to forecasts of a 0.2% increase.

Mixed performance on Asia-Pacific stock markets

Asia-Pacific stock markets showed mixed performance on Wednesday as escalating tensions between Israel and Iran, coupled with potential US involvement, weighed on investor sentiment. Hong Kong’s Hang Seng fell over 1%, leading regional declines, while Japan’s Nikkei 225 rose 0.7% to a four-month high, supported by a weaker yen. Japan’s trade data revealed a 1.7% drop in May exports, marking the first decline in nine months, with US-bound exports plunging 11.1% due to tariffs. Meanwhile, oil prices surged over 4% due to fears of disruptions to energy infrastructure.

German economic sentiment improves in June

Economic sentiment among German financial experts improved significantly in June, according to data released by the ZEW research institute on Tuesday. The ZEW sentiment index rose by 22.3 points compared to the previous month, reaching 47.5 points, exceeding analysts' expectations of 35.0 points. This marks the second consecutive month of improvement, following a sharp decline to -14.0 points in April due to concerns over US trade policy. The assessment of the current economic situation also improved, rising by 10.0 points to -72.0 points, slightly better than economists' forecasts of -75.0 points, though it remains at a subdued level.

Lagarde urges EU to reform decision-making 

European Central Bank President Christine Lagarde has criticised the European Union's decision-making process, stating that individual vetoes often hinder collective progress. In a Financial Times article published on Monday, Lagarde called for more qualified majority voting in critical areas to enable the EU to act more decisively. She also emphasised the need for reforms to strengthen the euro's global role, including completing the single market, reducing regulatory burdens, and advancing a capital markets union. Additionally, Lagarde encouraged leveraging the EU's position as the world's largest trading partner to secure new trade agreements.

Central banks increase focus on gold reserves

A survey by the World Gold Council (WGC), released on Tuesday, reveals that 43% of central banks plan to expand their gold reserves this year, the highest percentage since the survey began eight years ago. None of the surveyed central banks intend to reduce their holdings. In March, global central bank gold reserves totalled approximately 36,300 tonnes. While gold reserves are expected to grow, nearly three-quarters of respondents anticipate a decline in US dollar holdings within national reserves over the next five years. Factors such as lower interest rates, geopolitical uncertainties, and US trade policies have driven gold prices to record highs, peaking at USD 3500 per ounce in April.

Corporate and economic calendar

Corporate news in focus: There is no major corporate news scheduled today.

Economic data in focus: UK Consumer Price Index (08:00), UK core Consumer Price Index (08:00), UK retail price index (08:00), UK producer price index (08:00), Riksbank interest rate decision (09:30), Eurozone consumer prices (11:00), US building permits (14:30), US weekly initial jobless claims (14:30), Federal Reserve interest rate decision and economic projections (20:00) and press conference (20:30).

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