Iran strikes rattle markets as AI rally unwinds

Israel and Iran trade blows in a flare-up of tensions

Weekend developments saw Iranian forces launch successive missile strikes towards Israel, which Tehran described as a warning over hostile actions in Lebanon. Israel responded with air strikes on military targets in western and central Iran, with blasts reported near Karaj, west of the capital. 

President Trump reportedly pressed Israeli Prime Minister Netanyahu directly not to retaliate, but the Israeli military proceeded regardless. In response, Trump has said he ‘calls the shots’ and that Netanyahu has ‘no choice’ but to accept a deal with Iran, signalling a potential rough patch between the two leaders. 

Trump is clearly still seeking that off-ramp, but with peace talks in a fragile state and Hezbollah rejecting a US-brokered truce, prospects for a swift resolution are not looking good. Polymarket odds for a permanent peace deal between the US and Iran by 15 June fell to as low as 6%.

Asia-Pac equities tumble; Oil rises

Asia-Pacific equity markets tumbled overnight, with Japan’s Nikkei 225 down more than 4% and South Korea’s KOSPI tumbling over 7% – pencilling in its worst session since early March. Samsung and SK Hynix, which account for approximately 50% of the KOSPI, each shed more than 10% at the open. 

This follows a hefty close for US benchmarks after US jobs data came in much stronger than expected, with technology (XLK) bearing the brunt of losses, down 6.7%. The Nasdaq 100 fell 1,450 points (4.8%) to 28,957, marking its biggest one-day fall since April 2025. The S&P 500 fell 200 points (2.6%) to 7,383, forming a weekly bearish outside pattern and snapping a nine-week winning streak.

In the commodities complex, oil benchmarks – Brent and WTI – are higher this morning, both up by around 5% and eyeballing US$100/barrel. The move is a direct response to the escalation between Israel and Iran, with markets pricing in the risk of further disruption as the Strait of Hormuz remains all but closed to maritime traffic.

Blowout US jobs report shifts attention to this week’s US inflation data

The tail end of last week was dominated by the May US payrolls report, which showed the economy added 172,000 jobs. The figure shattered the upper estimate of 125,000, with the two-month net revision adding 93,000 new payrolls. The jobless rate also remained unchanged at 4.3%, while wage growth came in as expected at 3.4% YY and 0.3% MM – notably, the YY print was lower than April’s 3.6% reading.

While the headline number makes it hard to call the job market anything but strong and resilient, hiring was down to only a handful of sectors. In fact, if you strip those out of the equation, job growth has declined for several years.  

Nevertheless, the markets reacted as you would have expected. The USD caught a bid, EUR/USD explored lower territory, and US Treasury yields bear-flattened as the shorter end of the curve priced in additional Fed tightening. Money markets now fully price in a rate hike by year-end, up from about 18 bps before the jobs report landed. 

The week ahead will be quiet until Wednesday, when the May US CPI inflation report is released at 12:30 pm GMT. Personally, although we have updates from the BoC and ECB, this will be the key event for me this week, particularly given the ongoing conflict in the Middle East. 

Both headline and core YY measures are expected to reach 4.2% (up from 3.8%) and 2.9% (up from 2.8%), respectively, while the monthly measures are forecast to ease slightly to 0.5% and 0.3%, respectively. At its core, if price pressures rise more than expected, the idea of rate cuts this year will likely be off the table, and the market may fully price in a rate hike in October, particularly given the hawkish Fed commentary on inflation.