Global financial markets came under pressure on Tuesday amid growing fears of a wider Middle East war, as the conflict between Israel and Iran entered its fifth day. Equities declined while oil and traditional safe-haven assets gained ground. Meanwhile, the Bank of Japan's latest policy announcement drew muted market reaction as it outlined a slower pace for reducing its bond holdings.
Tensions flared further as U.S. President Donald Trump abruptly left the G7 summit in Canada, urging American citizens to evacuate Tehran. Reports also indicated that he had called for the National Security Council to convene in the White House situation room, fueling speculation of potential U.S. military involvement.
These developments prompted a risk-off sentiment among investors. U.S. S&P 500 futures fell 0.4%, while European market futures declined by 0.7%. Crude oil prices rose 0.7% to around $73 per barrel, after earlier spiking over 2% on concerns about possible supply disruptions in the region.
“There’s a growing belief that the U.S. could initiate military action in Iran,” said Tony Sycamore, market analyst at IG. “That’s injecting a fresh layer of uncertainty and prompting risk aversion.”
Amid the geopolitical strain, investors shifted to safe-haven assets. U.S. Treasury yields declined as demand increased, and gold rose 0.3%. In Asia, markets reacted more cautiously: MSCI’s Asia-Pacific index outside Japan ticked up 0.2%, while stocks in China and Hong Kong edged lower by 0.1%.
The conflict, which has become the most intense confrontation between Israel and Iran to date, has seen Israel launch airstrikes on Iranian media and nuclear infrastructure. Though oil production has not been disrupted, markets remain jittery given the region’s strategic significance for global energy supply.
In monetary policy news, the Bank of Japan kept its benchmark interest rate unchanged at 0.5% and reaffirmed its current bond tapering path through March 2026. However, it signaled a deceleration in its bond-purchase reduction plan for the period beyond April, aiming to ease pressure on long-term yields.
After years of propping up the economy through aggressive Japanese Government Bond (JGB) purchases, the BOJ has gradually begun unwinding its holdings. Yet, recent weak demand at bond auctions pushed long-term yields to record highs, prompting the bank to act cautiously.
As a result, the Japanese yen strengthened, trading at 144.56 per dollar, while yields on 5- and 10-year bonds climbed about three basis points. Analysts said the slower tapering pace would help stabilize long-term rates, especially ahead of the BOJ’s next bond test — a 20-year JGB auction slated for June 24.
“The BOJ’s move is in line with market expectations and should prevent abrupt spikes in long-term interest rates,” said Saisuke Sakai, senior economist at Mizuho Research and Technologies.
Attention now turns to the U.S. Federal Reserve, which is expected to hold interest rates steady at its upcoming meeting. Market participants will scrutinize Chair Jerome Powell’s remarks for clues on the timing of future rate cuts. Traders currently anticipate two reductions by year-end.
Meanwhile, trade tensions remain unresolved. Talks between Japan and the U.S. at the G7 summit failed to deliver a breakthrough, and a deal with the UK left metal tariffs unaddressed. The July deadline set by Trump for imposing new tariffs is fast approaching, keeping global investors on edge.
[Agencies]
