Markets still holding breath on potential US escalation vs Iran

Asia Market Update: Markets still holding breath on potential US escalation vs Iran; CN Lujiazui forum shows shift in national finance goals?; Focus on US Fed rate decision and FOMC projections.

General trend

- The Israel-Iran conflict stayed at the forefront of market concerns, although no fresh developments with markets waiting to see if there still be any direct US involvement, particularly with any Iranian nuclear facility (esp. Fordow) bomb-busting by US B-2 or B-52 bombers. Crude Oil prices slightly softer from renewed highs overnight amid the lack of action.

- US equity FUTs clawed back a little of their losses after geopolitical nervousness and weak May retail sales figures during the US session.

- Nikkei and Kospi again outperformed Asia, +0.8%, with the Kospi even closer to reaching highs last seen in 2021. Hang Seng continued this week's under-performance, -1.2%.

- Japan BOJ Gov Ueda comments late yesterday aligned with market expectations and the earlier BOJ decision of being completely inline (leaving policy unchanged). Ueda reinforced a cautious approach to monetary policy amid global uncertainties like US tariffs and Middle East tensions. OIS chances of a 25bps rate hike in Oct at 54% unchanged from the day before.

- Japan exports in May fell at the sharpest pace in 8 months, -1.7%, with declines in shipments of autos and steel. Increased exports to the EU did not make up for significant falls to China and the US along with much reduced exports to Asia. Imports in May also fell the most since Jan 2024. Core Japan machine orders for April were more or less in line.

- In trade news further signs of potential cracks in a US-Japan deal, with PM Ishiba commenting at the G-7 in Canada that he seeks possible agreement with the US “until the final minute”, reiterating that autos was a big sticking point, while Mitsubishi Motors said it will hike US auto prices by 2.1% [preparing for no deal scenario with the US?].

- Italian PM Meloni also said she could Not say she was ‘optimistic' on US trade talks.

- Possible snub by India PM Modi to Trump’s invitation to the US, reportedly saying “India has never accepted third-party mediation” (likely in reference to Trump's claims to have helped settle the India-Pakistan dispute back in early May. Also note that Pres Trump to have lunch with Pakistan's Chief of Army staff later today in DC).

- China’s annual Lujiazui Forum in Shanghai kicked off: PBOC Gov Pan said that a digital Yuan operations center would be set up in Shanghai to ‘pioneer structural monetary policy’. Added that he sees ‘currency competition’ as USD dominance ‘falters’. Meanwhile the Securities Regulator (CSRC) made an interesting comment that it is better to use capital markets to promote technology and innovation. [This is a shift from prior talk of govt assistance via SOE’s and govt programs – a potential nod to long-time reformer Wang Yang whispered on social media as the next leader of the CCP?] . Comments at Lujiazui also from the Heads of SAFE (FX regulator) and NFRA (Financial Regulator).

- US equity FUTs +0.1% during Asian trading.

Looking ahead (Asian-weighted releases, using Asian time zone)

- Wed Jun 18th (Wed eve UK May CPI, Wed night US May Housing starts, US Fed / FOMC Projections, Rate Decision + Presser).

- Thu Jun 19th NZ Q1 GDP, AU May Jobs, (Thu eve BOE Rate Decision).

- Fri Jun 20th JP May CPI, CN Jun LPR.

Holidays in Asia this week

- Thu Jun 19th (USA Juneteenth).

- Fri Jun 20th New Zealand.

Headlines/economic data

Australia/New Zealand

- ASX 200 opens -0.1% at 8,531.

- Australia May Westpac Leading Index M/M: -0.06% v -0.01% prior.

- Australia PM Albanese: To commence negotiations on security and defense partnership with the EU; expects to meet with US President Trump 'soon'.

- Australia sells A$900M vs. A$900M indicated in 2.75% Jun 2035 bonds; Avg Yield: 4.2413% v 4.2457% prior; bid-to-cover: 3.44x v 2.75x prior.

- New Zealand Q1 Current Account Balance (NZD): -2.3B v -2.2Be.

- NZ Treasury comments ahead of Q1 GDP data [Jun 19th]: Confident of 2025 growth despite 'weak' May data.

- New Zealand May Non-resident bond holdings: 61.9% v 61.6% prior.

- New Zealand to stop 5-yearly Census; 2028 edition will not proceed - financial press.

- New Zealand Q2 Westpac Consumer Confidence: 91.2 v 89.2 prior.

- Fonterra Global Dairy Trade Auction Dairy Trade price index: -1% v -1.6% prior.

China/Hong Kong

- Hang Seng opens -0.5% at 23,859; Shanghai Composite opens -0.1% at 3,386.

- PBOC Gov Pan: To establish digital yuan (CNY) international operation center in Shanghai - comments at the Lujiazui Forum.

- China Securities Regulator (CSRC) Head Wu Qing: To better use capital markets to promote technology and innovation - comments at the Lujiazui Forum.

- China SAFE [FX regulator] Chief Zhu Hexin: China has conditions to maintain stable FX market - comments at the Lujiazui Forum.

- China National Financial Regulatory Administration (NFRA) Head Li Yunze: Global economic and financial system policies face challenges - comments at the Lujiazui Forum.

- (UZ) China Pres Xi: Should expand bilateral trade and investment with Uzbekistan; Urges avoiding further escalation of Middle East tension - comments at meeting with Uzbek Pres Mirziyoyev via CCTV.

- Hong Kong and Shanghai said to tighten financial ties at the upcoming Lujiazui forum - financial press.

- China sells 5-year Bonds: Yield: 1.4290% v 1.4652% prior; bid-to-cover 3.9x v 5.84x prior.

- China PBOC sets Yuan reference rate: 7.1761 v 7.1746 prior.

- China PBOC Open Market Operation (OMO): Injects CNY156B in 7-day reverse repos; Net drains CNY7.7B v drains CNY1.3B prior.

Japan

- Nikkei 225 opens -0.4% at 38,382.

- JAPAN MAY TRADE BALANCE: -¥637.6B V -¥896.5BE; Adjusted Trade Balance: -¥305.5B v -¥359.0Be.

- Japan Apr Core Machine Orders M/M: -9.1% v -9.5%e; Y/Y: 6.6% v 4.2%e.

- Japan PM Ishiba: Shared understanding in G-7 on supply of critical minerals; Japan must not sacrifice national interest for a deal (with the US).

- US Pres Trump reiterates sees chance of trade deal with 'tough' Japan - US financial press on Air Force One

- Japanese PM Ishiba meets with South Korea Pres Lee for first time (sidelines of G7) - Japanese press

- Mitsui OSK (9104.JP) CEO: Continuing 'normal' shipping operations in the Arab Gulf, closely monitoring Israel/Iran situation

Korea

- Kospi opens -0.6% at 2,933.

- South Korea said to consider new capital rules on the household loans of banks - Local Press.

- South Korea Parliament to hold hearing for PM nominee between Jun 24-25th.

Other Asia

- Singapore MAS Survey of Economists: Cuts Singapore 2025 GDP to 1.7 (prior 2.6%); Cuts 2025 Core CPI to 0.8% (prior 1.5%) and cuts 2025 Headline CPI to 0.9% (prior 1.7%).

- (IN) India Modi and US President Trump spoke over the phone following the G7; Modi 'declined' Trump invite visit to the US, cited 'engagement'.

- Thailand May Trade Balance: +$1.1B v -$3.3B prior: Exports Y/Y: 18.4% v 10.2% prior.

- Taiwan Central Bank (CBC) reportedly asked lenders to delay USD sales from exporters until 10:00 local (22:00 ET) - press [overnight update).

North America

- (CA) Canada PM Carney: Partnering with US on Golden Dome (missile defense) project would "make sense"; Looking at risk of third-country steel flows - financial press.

- (MX) Mexico Pres Sheinbaum: Has agreed to work together with Trump on diverse topics; Trump also wants deal on issues of concern.

- (US) Follow up: US regulators to propose lowering SLR for largest banks - financial press.

- (CL) CHILE CENTRAL BANK (BCCH) LEAVES OVERNIGHT RATE TARGET UNCHANGED AT 5.00%; AS EXPECTED.

- (US) MAY IMPORT PRICE INDEX M/M: 0.0% V -0.2%E; Y/Y: 0.2% V 0.0%E.

- (US) MAY ADVANCE RETAIL SALES M/M: -0.9% V -0.6%E; RETAIL SALES (EX-AUTO) M/M: -0.3% V +0.2%E.

- (US) Jun New York Fed Services Business Activity: -13.2 v -16.2 prior.

- (US) Reportedly Pres Trump has remained unconvinced, at least so far, about Israeli aim to eliminate Iranian leaders contemplating regime change - Axios.

- (US) WSJ's Timiraos: There are good reasons to think the Fed would be preparing to cut interest rates this week due to recent improvements on inflation—if not for the risk that tariffs pose to prices.

- (US) MAY INDUSTRIAL PRODUCTION M/M: -0.2% V 0.0%E.

- (US) JUN NAHB HOUSING MARKET INDEX: 32 V 36E.

- (US) APR BUSINESS INVENTORIES: 0.0% V 0.0%E.

- (IR) US PRES TRUMP: WON'T TAKE IRAN SUPREME LEADER OUT; (WE WANT) UNCONDITIONAL SURRENDER! - TRUTH SOCIAL POST.

- (IR) US Officials say Trump is seriously considering a strike on Iran; Trump will meet with National Security team at 1PM EST - Axios.

- (US) Fed to meet June 25th regarding supplementary leverage ratio (SLR) changes.

- (CA) Bank of Canada (BOC) Summary of Deliberations (May Minutes): Rate cut possible if economic growth weakens and inflation is contained; Direct tariff effects would start to show up in data in coming months.

- (US) Atlanta Fed GDPNow: Cuts Q2 GDP estimate from 3.8% to 3.5%.

Europe

- (UK) Chancellor (Fin Min) Reeves: Reasons to be confident about UK growth and productivity; Any future increases in UK defense spending will be in a future Parliament - investor conf comments.

- (IL) Israel Def Min Katz: Affirms Israel is not in talks with Iran; To attack significant targets in Tehran today; Warns Iran leader Khamenei to remember what befell (former Iraqi dictator) Saddam Hussein; Fordow nuclear facility is issue that will be addressed.

- (IR) IAEA: Elements indicate direct impacts on enrichment halls at Natanz; No changes to report at Isfahan/Esfahan and Fordow sites - X post.

- Reportedly shipping insurance rates to Israel 3x higher w/w following Iranian attacks - press.

- (EU) EU said to plan new fast-track permitting process for defense deals; Will favor weapons deals - press.

- (UK) PM Starmer: Nothing US Pres Trump said suggests US about to get involved in Israel-Iran conflict.

- (EU) ECB's Villeroy (France): We're in good position almost at 2% inflation target; There's more uncertainty since last Thu after Israel-Iran conflict; We should react quickly if necessary.

- (IR) Series of continuous, intense explosions heard west of Tehran - Iranian state media.

Levels as of 01:20 ET

- Nikkei 225 +0.8%, ASX 200 -0.1%, Hang Seng -1.2%; Shanghai Composite -0.1%; Kospi +0.8%.

- Equity S&P500 Futures +0.1%; Nasdaq100 +0.1%; DAX -0.3%; FTSE100 flat.

- EUR 1.1475-1.1508; JPY 144.93-145.44; AUD 0.6468-0.6506; NZD 0.6010.6038.

- Gold +0.2% at $3,411/oz; Crude Oil -0.5% at $72.87/bbl; Copper +0.9% at $4.8323/lb.