Risk-Off Mood Deepens as Fresh US-Iran Strikes Lift Oil, Inflation Fears

GLOBAL MOOD: Cautiously Risk Off
Drivers: Fresh US Strikes on Iran, Strait of Hormuz Risks

Risk aversion returned to global markets on Thursday as fresh US strikes on Iranreignited concerns over disruptions to energy supplies through the Strait of Hormuz, pushing oil prices higher and prompting investors to cut exposure to equities amid growing inflation worries.

The risk-off sentiment weighed on Asia-Pacific equities, with South Korea's Kospi leading regional declines, while Japan's Nikkei 225 and Australia's ASX 200 also traded lower. Investors remained focused on the possibility that a prolonged conflict could disrupt one of the world's most important oil shipping routes, driving crude prices higher and complicating the inflation outlook for major economies.

Brent crude and WTI futures rose nearly 3% after the latest military escalation, while US inflation accelerated to 4.2% in May, reinforcing concerns that energy-driven price pressures could keep central banks cautious on rate cuts. Adding to the cautious mood, Oracle's plans to raise $20 billion to fund its artificial intelligence expansion sparked concerns over funding costs and pressured technology shares globally. Together, rising geopolitical risks, higher oil prices and persistent inflation concerns kept markets firmly in defensive mode.

THE BIG STORY
The United States launched fresh overnight strikes on multiple targets in Iran on Wednesday, escalating West Asia tensions and renewing concerns over risks to global energy routes. The US military said the strikes responded to continued Iranian aggression, while Donald Trump warned of further action unless Tehran agreed to a peace deal.

US Central Command said operations began shortly after midnight in Tehran. Iran’s top military command warned it would target vessels passing through the Strait of Hormuz, heightening fears over the key oil chokepoint, while Iranian media reported two ships were fired upon near the strait.

US Central Command denied that the Strait of Hormuz had been fully closed, saying commercial vessels were still transiting despite Iranian threats. Trump also said ships continued crossing without Iran’s permission as part of a covert military operation.

The exchange marked another escalation after April’s fragile ceasefire. Investors remained focused on risks to Gulf shipping, oil infrastructure and energy-driven inflation.

Separately, US fiscal data showed the federal government recorded a budget deficit of $293 billion in May, narrower than the $316 billion deficit recorded a year earlier but wider than market expectations of a $275 billion shortfall. Government spending declined to $628 billion, while receipts fell to $335 billion. In the first eight months of fiscal year 2026, the cumulative federal budget deficit widened to $1.25 trillion, underscoring continued fiscal pressures amid elevated interest costs and slowing revenue growth.

Data Spotlight
US annual inflation accelerated to 4.2% in May from 3.8% in April, matching expectations and marking the highest reading since April 2023. It was the third consecutive monthly increase in headline inflation, driven primarily by a sharp surge in energy prices linked to the conflict involving Iran. Energy costs jumped 23.5% year-on-year, while gasoline prices surged 40.5% and fuel oil rose 58.9%. Inflation also accelerated for shelter at 3.4% and food prices at 3.1%.

On a monthly basis, CPI rose 0.5% in May, slightly slower than April’s 0.6% increase but in line with forecasts. Energy prices increased 3.9% during the month and accounted for more than 60% of the overall rise in consumer prices. Core inflation, which excludes food and energy, increased to 2.9% year-on-year from 2.8%, reaching its highest level since September 2025. Shelter, transportation services, medical care services and apparel remained key contributors to underlying price pressures. However, monthly core CPI rose by a softer-than-expected 0.2%, easing from 0.4% in April and indicating that broader inflation pressures outside energy remained relatively contained.

Meanwhile, US crude oil inventories fell by 7.228 million barrels in the week ended June 5, marking the seventh consecutive weekly decline and exceeding expectations for a 4-million-barrel draw. Cushing inventories also declined for a seventh straight week. However, gasoline and distillate inventories unexpectedly increased, suggesting mixed fuel demand conditions despite tightening crude supply.

Takeaway:
Surging energy prices linked to West Asia tensions continued driving headline US inflation higher, reinforcing expectations that the Federal Reserve may need to maintain restrictive monetary policy for longer despite some moderation in underlying core price pressures.

WHAT HAPPENED OVERNIGHT

• US stocks fall over 1% as chip selloff deepens and Iran tensions escalate
  • The Dow fell 1.87%, the S&P 500 lost 1.62%, and the Nasdaq dropped 1.98% as renewed US-Iran hostilities and tech weakness weighed on markets.
  • The Philadelphia Semiconductor Index fell 3.6%, with Nvidia and Broadcom among the biggest drags on the S&P 500.
  • The S&P 500 tech sector confirmed a correction, ending 11% below its June 2 record high close.
  • Super Micro Computer tumbled 28% after announcing plans to raise $7 billion in equity offerings to fund AI server component purchases.
  • Trucking stocks XPO, JB Hunt, and Old Dominion fell after Amazon announced expansion of its less-than-truckload freight services, dragging industrials down 3.4%.
  • The Fed is widely expected to hold rates at its June meeting, though markets are pricing at least one 25 basis point hike by year-end.
  • SpaceX's $1.75 trillion IPO on Friday, targeting a record $75 billion raise, is adding to investor caution over tech sector exuberance.
  • Oracle shares slipped 1% after the bell following its quarterly results.

• US Treasury yields steady as in-line CPI offers modest relief
  • The 10-year Treasury yield held at 4.52%, pulling back from an intraday high of 4.55% after CPI data came in broadly as expected.
  • Annual inflation rose to 4.2% in May, in line with forecasts, while core CPI rose just 0.2% month-on-month, undershooting estimates.
  • Traders modestly pared back rate hike bets following the release, though a 25 basis points Fed hike in December remains fully priced in.
  • Thursday's PPI report is next in focus for further clues on underlying inflationary pressures.
  • Last week's strong jobs data and solid broader economic indicators continue to point to a resilient and potentially reaccelerating US economy

• Dollar slips as CPI meets expectations and West Asia tensions flare again
  • The dollar index dipped to 99.8 after May CPI came in broadly in line, with core month-on-month inflation undershooting at 0.2%.
  • Core CPI climbed to 2.9% year-over-year, the highest since September 2025, while monthly CPI rose 0.5% as expected.
  • West Asia tensions re-escalated as the US and Iran exchanged fresh strikes, with Trump warning Iran is taking "too long" to negotiate and will "pay the price."
  • Trump's remarks cast fresh doubt on the durability of the ceasefire and prospects for a lasting deal.

• Oil closes nearly 2% higher as Trump threatens Iran with fresh strikes
  • Brent settled at $93.10/bbl, up by 1.8% and WTI at $90.03, a 2% hike, after Trump vowed to attack Iran "very hard" if no peace deal is reached.
  • Gains pared after Trump revealed the US military secretly escorted over 100 million barrels out of the Strait of Hormuz.
  • The US struck Iranian targets overnight, while a precision strike on a Gulf of Oman vessel left three Indian seafarers missing.
  • US crude inventories fell 7.2 million barrels last week, far exceeding the 4-million-barrel draw expected, with SPR stocks at their lowest since August 2023.
  • The DOE sought to loan up to 40 million barrels from the SPR to ease fuel prices.
  • The IAEA passed a US-backed resolution demanding Iran declare enriched uranium stocks, complicating peace talks further.
  • Strait of Hormuz traffic remains well below pre-war levels, with lower Chinese imports capping further upside.
  • Rising energy costs pushed US consumer inflation to its fastest pace in three years, reinforcing Fed rate hike bets for December.

Day’s Ledger*

Economic Data

• US May PPI Data
  
• US weekly Initial Jobless Claims Data

Corporate Actions

• Hindustan Oil Exploration Company board to consider financial results
  
• Ganga Forging board to consider fund raising
  
• Ratnaveer Precision Engineering board to consider fund raising
  
• Laxmi Cotspin board to consider fund raising 

Policy

• Eurogroup Meetings
  
• ECB Interest Rate Decision
  
• ECB President Lagarde Speaks 

Tickers to Watch

• BANK OF BARODA raised 1-month, 3-month and 6-month MCLR by 5 bps.
• CANARA BANK: To increase 1-month and 3-month MCLR by 5 bps effective June 12.
• Government approved the merger of REC into POWER FINANCE CORP.
• HONASA CONSUMER reported 30% growth in focus categories in FY26 and targets a 15% EBITDA margin through a 500-bps margin expansion.
• IIFL FINANCE board approved allotment of $500 million fixed-rate senior secured notes due 2029.
• POWER GRID appointed Venkata S V as CFO, approved a ₹4.85 billion SCADA system upgrade and secured an ¥80 billion loan facility.
• STATE BANK OF INDIA increased FCNR(B) deposit rates across 3-5 year tenors, with hikes of up to 295 bps on select maturities.
• UCO BANK raised 3-month and 6-month TBLR by 10 bps to 5.40% and 5.60%, respectively.
• VMART RETAIL chief Operating Officer Vineet Jain has resigned.
• ZEE ENTERTAINMENT ENTERPRISES approved raising at least ₹23 billion in one or more tranches for strategic initiatives; secured over a dozen advertisers for FIFA World Cup 2026 coverage.

Must Read 

• Strategic Oil Reserves: India’s Insurance Against Conflict
  
• Beyond Minimum Wages: Karnataka and India's Search for a New Growth Compact
• Should India Create More Cooperative Banks, or Better Banks?
• Can RBI's Capital Flow Push Offset Global Yield Pressures?
• India summons US diplomat over Oman strike
  
• To win the deep-tech race, India needs ‘General Innovation Rules’
• To hike Lok Sabha strength, Government works on more clarity; eyes South, DMK support
• Power subsidies are slowing household solar adoption. A solution: More subsidies 

See you tomorrow with another edition of The Morning Edge.

Have a great trading day

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(*Compiled from various media sources)