Global Equities Slide as Iran-Israel Tensions Rekindle Uncertainty

GLOBAL MOOD: Risk Off
Drivers: Rising Geopolitical Escalation Risks

Global markets entered the week in a clear risk-off mode as renewed geopolitical tensions in West Asia overshadowed economic fundamentals and recent hopes for diplomatic progress. Investor sentiment deteriorated after reports that Iran launched missiles toward Israel, raising concerns that the fragile ceasefire framework in the region could unravel and trigger a broader escalation.

Asian equities came under heavy pressure, with South Korea's Kospi plunging over 8% and Japan's Nikkei falling more than 3%, reflecting a sharp reduction in risk appetite. The sell-off followed a difficult session on Wall Street on Friday, where technology stocks led losses after stronger-than-expected US employment data pushed Treasury yields higher and reinforced expectations of prolonged restrictive monetary policy.

Markets are now confronting a combination of rising geopolitical risks and higher-for-longer interest rate concerns. Fresh Israeli strikes near Beirut and renewed threats from Iran have revived worries over regional stability, energy security and potential disruptions to global trade routes. At the same time, escalating tensions between Russia and Ukraine have added another layer of uncertainty to the global outlook.

Investors are also closely watching upcoming US inflation data and the highly anticipated SpaceX listing, which could provide a fresh test of investor confidence in richly valued technology and AI-related assets. For now, geopolitical uncertainty, elevated bond yields and concerns over global growth are driving defensive positioning across financial markets.

THE BIG STORY
Israel struck the southern outskirts of Beirut on Sunday for the first time since the US announced a ceasefire framework for Lebanon last week, raising concerns that efforts to contain the broader West Asia conflict were deteriorating again. The strike threatened to undermine ongoing negotiations between Washington and Tehran aimed at ending the war launched earlier this year.

Iran has repeatedly stated that any lasting agreement with the United States would depend on a stable ceasefire in Lebanon, where Israel launched military operations against Hezbollah in March. Following the latest Israeli strikes, influential Iranian lawmaker Ebrahim Rezaei warned of a “decisive and painful response”, heightening fears of further retaliation and broader regional escalation. The renewed tensions came as diplomatic progress between Washington and Tehran remained limited. Donald Trump has repeatedly threatened to resume large-scale strikes on Iran unless negotiations produce a breakthrough, keeping geopolitical risk premiums elevated across global markets and energy assets.

Separately, tensions in Eastern Europe also intensified after Volodymyr Zelenskyy accused Russia of deliberately striking a spent nuclear fuel storage facility near the Chornobyl power plant. According to the International Atomic Energy Agency, the strike caused significant damage to infrastructure close to stored nuclear material, although no increase in radiation levels was reported.

The simultaneous escalation across West Asia and Eastern Europe reinforced concerns over geopolitical instability, energy security and broader market volatility.

Data SpotlightUS consumer credit increased by $20.7 billion in May, above expectations of an $18 billion rise, following a revised $22.3 billion increase in April. Revolving credit, including credit card debt, rose to $1.31 trillion from $1.30 trillion. In contrast, non-revolving credit, such as auto and student loans, increased to $3.76 trillion from $3.74 trillion, signalling continued strength in household borrowing activity.

Meanwhile, the US economy added 172,000 jobs in May, sharply above market expectations of 85,000 and following an upwardly revised 179,000 increase in April. Leisure and hospitality led hiring gains with 70,000 new jobs, followed by local government (+55,000), healthcare (+35,000) and manufacturing (+7,000). Employment in financial activities declined by 22,000, while most other sectors showed limited changes. Revisions to March and April payrolls added a combined 93,000 jobs to previously reported figures.

The unemployment rate remained steady at 4.3%, in line with expectations. Total employment rose by 149,000, while the broader U-6 unemployment rate eased to 8.1% from 8.2%. Labour force participation remained unchanged at 61.8%, its lowest level since October 2021.

Takeaway:
Strong payroll growth and resilient consumer borrowing reinforced expectations that the US economy will remain firm despite geopolitical uncertainty and elevated interest rates, supporting the case for the Federal Reserve to maintain a restrictive policy stance.

WHAT HAPPENED OVERNIGHT

• US Stock snapped a nine-week winning streak as a hot jobs report and chip selloff delivered a sharp blow
  • The Dow fell 1.35%, the S&P 500 shed 2.64%, and the Nasdaq plunged 4.18%, ending the S&P 500's longest weekly winning streak since December 2023.
  • The Philadelphia Semiconductor Index suffered its biggest single-day drop since March 2020, wiping out over $1 trillion in market value.
  • Markets are now pricing at a 42.7% chance of a rate hike at the Fed's December meeting.
  • Nvidia lost 6.2%, while Intel, Micron, AMD, and Broadcom slid between 7.9% and 13.3% as tech stocks bore the brunt of the selloff.
  • Iran reaffirmed its support for Hezbollah and demanded Israeli troop withdrawal from southern Lebanon.
  • Therefore, hopes of a near-term peace deal are dimmed, and fears of wider inflation have risen.
  • S&P Global ruled out a swift entry for SpaceX into the S&P 500 after its IPO, as it will not be changing eligibility requirements for its major indices.

• US Treasury yields climbed on strong jobs data
  • US 10-year Treasury yields climbed around 6 basis points to 4.54% on Friday, following a stronger-than-expected jobs report.
  • The upward move in yields reflected growing market conviction that the Fed may need to raise interest rates once more.
  • Markets are now almost fully pricing at a quarter-point hike by year-end, up sharply from prior expectations.
  • The US economy added 172,000 jobs in May, well ahead of the 85,000 forecast, with March and April figures revised higher as well.
  • The unemployment rate held steady at 4.3%, while average hourly earnings rose 0.3% in the month, broadly in line with estimates.
  • Broad-based job gains across sectors reinforced the narrative of a resilient US labour market showing little sign of cooling.
  • Persistently elevated inflation, running above the Fed's 2% target, added further weight to the case for additional monetary tightening.
  • The rate-sensitive 2-year Treasury yield saw a sharper move, rising approximately 10 basis points to 4.16%.

• US Dollar holds gains as strong jobs data lend support
  • The dollar index edged up to around 99.5 on Friday and reported weekly gains. y, staying on track for a weekly gain.
  • Strong US jobs data reinforced expectations that the Fed may keep policy tight or raise rates further.
  • Ongoing Middle East uncertainty continued to support safe-haven demand, boosting the dollar.
  • President Trump signalled peace talks were nearing their final stage and showed reluctance to escalate tensions with Iran.
  • However, Iranian Foreign Minister Araghchi said negotiations had made no meaningful progress.
  • Hezbollah's rejection of a US-mediated Israel–Lebanon ceasefire proposal kept geopolitical risks elevated.

• Oil prices slide further as weak demand, stalled West Asia talks weigh 
  • Brent crude settled 2% lower at $93.09 a barrel, while WTI slid 3% to around $90.30.
  • A lack of breakthrough in US-Iran talks weighed on sentiment, with disagreements over Lebanon continuing to cloud prospects of a broader deal.
  • Chinese crude imports fell to their lowest level in ten years, reflecting reduced refinery activity and softening demand.
  • Several analysts now expect global oil demand to slow significantly this year.
  • An explosion briefly disrupted operations at Oman's Mina Al Fahal export terminal before resuming.

Day’s Ledger* 

Economic Data

• Japan Jan-mar GDP
• Germany April Factory Orders 

Corporate Actions

• HDB Financial Services board to consider fund raising
• Aye Finance board to consider fund raising
  

Policy

• German Buba Balz Speaks

Tickers to Watch

• ADANI ENERGY SOLUTIONS informed that SBI Mutual Fund acquired a 0.5% stake from GQG Partners in a block deal valued at ₹9.58 billion.
• ADANI ENTERPRISES informed that GQG Partners sold a 1.3% stake worth ₹47.60 billion through block deals, with SBI Mutual Fund acquiring 16.4 million shares at an average price of ₹2,913.40 apiece.
• ADANI PORTS AND SPECIAL ECONOMIC ZONE's step-down subsidiary Adani Harbour International FZCO incorporated a wholly owned shipping subsidiary, Harbour International Shipping FZCO, in the UAE.
• ALLIED BLENDERS AND DISTILLERS informed that Alok Gupta has resigned as Managing Director effective May 31, 2026, with Amar Sinha appointed Managing Director for a three-year term from June 1.
• CREATIVE NEWTECH along with its consortium partner, secured an advance work order worth ₹31.95 billion from BSNL for the BharatNet Middle Mile Network Project in Odisha.
• HCLTECH awarded $1 million under the third edition of its Climate Action Grant in the Americas to support scalable climate solutions.
• HG INFRA ENGINEERING received the completion certificate for its ₹49.71 billion package of the Ganga Expressway project in Uttar Pradesh.
• HINDUSTAN ZINC signed an MoU with TERI for a 250-hectare ecological restoration project in Rajasthan.

Must Read

• Dollars Now, Rates Later
• RBI Defends the Framework, Not the Rupee
• RBI’s Capital Inflow Bet Buys Time, Not a Solution
• India's Growth Puzzle Is Really About Capability
• Cockroaches May Be Videshi, But The Rot Is Desi
• When Markets Run on Empty
• RBI's Dollar Toolkit May Be Too Small for the Problem
• How a Wartime Rent Freeze Became Mumbai's Strange Inheritance
• India’s Fiscal Architecture Cannot Manage Two Demographic Futures
  
  

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See you tomorrow with another edition of The Morning Edge.

Have a great trading day

FX Firewall Buys the RBI Time

The RBI’s policy decision today was about much more than holding rates.

Faced with persistent pressure on the rupee, a third consecutive year of balance-of-payments stress, and rising inflation risks, policymakers chose a route that deserves closer attention. Rather than deploying interest rates to defend the currency, the RBI and the government announced a coordinated package aimed at attracting foreign capital, improving external-sector resilience and easing pressure on domestic funding conditions.

Shailendra Jhingan examines why today's measures could reshape the rupee narrative, alter the balance-of-payments outlook and influence the path of monetary policy over the months ahead.

The broader significance lies in what these measures achieve. By strengthening the external account through capital-flow and liquidity tools, they potentially give monetary policy the space to remain focused on its primary mandate of managing the growth-inflation trade-off.

That does not necessarily mean the rate cycle is over. With inflation projected to rise sharply over the coming quarters and food and energy risks still elevated, the possibility of 50-75 basis points of rate hikes remains very much alive.

The policy message may therefore be simple: dollars now, rates later.

(*Compiled from various media sources)