Geopolitical Risks Weigh on Equities as Oil Remains Elevated

GLOBAL MOOD: Cautious Risk Off
Drivers: Escalating Gulf Conflict, Persistent Geopolitical Uncertainty

Asia-Pacific markets opened lower on Thursday, reflecting a clear risk-off tone as escalating tensions between the US, Israel and Iran heightened concerns over global energy supplies and inflation. Fresh Iranian strikes on Kuwait and reported attacks targeting US-linked assets in the Gulf reinforced fears that the conflict could broaden further, threatening critical energy infrastructure and shipping routes around the Strait of Hormuz.

The renewed military escalation pushed oil prices higher, adding to concerns that elevated energy costs could prolong inflation pressures globally. Investors also remained wary of the potential impact on central bank policy, as sustained oil-driven inflation could delay interest-rate cuts and keep financial conditions tighter for longer.

While news of a US-brokered ceasefire between Israel and Lebanon offered a potential path towards regional de-escalation, markets appeared sceptical given previous ceasefires failed to deliver lasting stability.

The combination of rising geopolitical uncertainty, higher oil prices and inflation risks encouraged investors to reduce exposure to risk assets and favour defensive positioning.

THE BIG STORY
Iran struck Kuwait, damaging its airport, killing one person and injuring more than 60, in a sharp escalation of the West Asia conflict. Iranian media also said the Revolutionary Guards targeted the US Fifth Fleet headquarters in Bahrain, a US airbase and a vessel in the Gulf, though US Central Command said its bases were not successfully hit. The US military also confirmed new “defensive strikes” in southern Iran, targeting missile launch sites, boats allegedly laying mines near shipping lanes, and facilities on Qeshm Island near the Strait of Hormuz. The escalation lifted oil prices by about 2% as markets weighed rising risks to regional energy infrastructure and trade routes.

Separately, the Trump administration said Israel and Lebanon had agreed to a ceasefire to halt fighting between Israel and Hezbollah. Brokered in Washington, the deal was seen as a possible step toward wider regional de-escalation, especially after Tehran tied progress in US–Iran talks to ending the fighting in Lebanon. Under the proposal, Hezbollah would stop attacks on Israel and withdraw operatives from the South Litani Sector, according to the US State Department. But earlier Israel-Lebanon ceasefires failed to end hostilities fully, leaving implementation uncertain.

Meanwhile, domestic pressure on Donald Trump grew after the Republican-led US House passed a resolution seeking to block further military action against Iran without congressional authorisation. The narrow bipartisan vote reflected rising unease, including among some Republicans, as the war entered its fourth month. Though largely symbolic unless the Senate approves it, the vote exposed deeper divisions in Washington and marked a rare bipartisan challenge to presidential war powers during an active conflict.

Data Spotlight
The ISM Services PMI rose to 54.5 in May from 53.6 in April, above forecasts of 53.8, marking the strongest expansion in three months. Business activity increased to 57.7 from 55.9, while new orders rose sharply to 57.3 from 53.5. Inventory growth also accelerated to 62.5 from 53.1, reflecting continued stockpiling amid supply-chain uncertainty linked to tensions in West Asia. However, employment contracted for a third straight month at 47.9 as firms continued hiring freezes and delayed replacement hiring.

Separately, ADP data showed US private payrolls increased by 122,000 in May, above forecasts of 117,000 and the strongest gain since January 2025. Hiring remained broad-based, led by education and health services (+57,000), trade and transportation (+36,000), and professional services (+11,000), highlighting continued labour market resilience.

Meanwhile, US crude oil inventories fell by 7.974 million barrels in the week ended May 29, far exceeding expectations for a 4-million-barrel draw and marking the largest decline since February. Stocks at the Cushing hub declined by 583,000 barrels, while net crude imports fell by 249,000 barrels per day. However, gasoline inventories rose by 3.364 million barrels and distillate stocks increased by 1.502 million barrels, both sharply against expectations for declines, suggesting softer near-term fuel demand trends despite tighter crude supply.

Takeaway:
Strong US services activity and resilient labour demand continued supporting growth momentum, but elevated energy-related price pressures and tightening crude inventories reinforced expectations that inflation risks could remain persistent for longer.

WHAT HAPPENED OVERNIGHT

• US markets retreat as West Asia conflict rattles investors and stirs inflation concerns
  • Wall Street's three major indices ended in the red: the Dow 1.21%, the S&P 0.74%, and the Nasdaq 0.89%.
  • Renewed US-Iran hostilities pushed oil prices higher, raising fears that energy-driven inflation could spiral into a broader economic threat.
  • Six of the Magnificent Seven AI-related mega caps ended lower, though Meta stood out with a 4.2% gain.
  • Strait of Hormuz closure duration has emerged as the key variable, as a prolonged shutdown could rule out any Fed easing through 2026.
  • Asset managers took a beating after Switzerland's Partners Group froze withdrawals from an $8.6 billion private equity fund, dragging KKR, Blackstone, Blue Owl, and Ares between 3.9% and 4.2% lower.
  • Chipmakers witnessed a broader selloff as the semiconductor index climbed 1.4%, with Marvell, Intel, Qualcomm, and Sandisk posting gains of 3.7% to 6.7%.
  • GameStop surged 6% on the back of stronger quarterly revenue and a $2 billion share buyback announcement.

• US Treasury yields climbed as strong labour data reinforced Fed tightening bets
  • The US 10-year Treasury yield rose further to 4.49% as treasury market reacted to stronger-than-expected US labour market data and rising inflation concerns.
  • ADP data showed private-sector employment increased by 122,000 in May, exceeding expectations and marking the strongest reading since January 2025.
  • Earlier JOLTS data also showed job openings climbed to their highest level since November 2024, reinforcing signs of resilient labour demand.
  • Investors increasingly expect the Federal Reserve to maintain a restrictive policy stance and potentially raise rates later this year.
  • Treasury prices also remained under pressure from escalating tensions in West Asia.
  • Oil prices rose for a third consecutive session, renewing concerns that higher energy costs could intensify inflationary pressures.
  • Markets now priced at an 85% probability of a 25-basis-point Fed rate hike by year-end, sharply higher from around 60% a week earlier.

• US Dollar climbed to two-month high as strong labour data boosted Fed hike expectations
  • The US dollar index strengthened to 99.4, reaching its highest level in around two months.
  • Stronger-than-expected US labour market data reinforced expectations of tighter Federal Reserve policy.
  • Rising oil prices and escalating tensions in West Asia continued supporting the dollar through higher inflation expectations.
  • Oil prices advanced for a third consecutive session amid fears over regional instability and supply disruptions.
  • Markets sharply increased expectations for further Federal Reserve tightening.

• Oil prices climb as West Asia hostilities deepen and diplomatic efforts stall
  • Brent crude settled 1.89% higher at $97.81 a barrel, while US WTI climbed 2.41% to $96.02, marking a second consecutive session of gains.
  • Oil prices extended gains from the previous session as geopolitical tensions in West Asia intensified further.
  • Markets remained concerned over the lack of progress in negotiations between Washington and Tehran.
  • Iran launched ballistic missiles toward Kuwait and Bahrain, according to regional authorities and state media.
  • Kuwaiti officials reported one fatality and multiple injuries following the attacks.
  • US forces also carried out strikes on Iran’s Qeshm Island, further escalating regional tensions.
  • Investors continued pricing in higher geopolitical risk premiums amid fears of broader supply disruptions across key shipping and energy routes.
    
    

Day’s Ledger*

Economic Data

• US weekly Jobless Claims Data 

Corporate Actions

• Hinduja Global Solutions board to consider dividend
  
• Satin Creditcare Network board to consider fund raising options
  
• Sigma Advanced Systems board to consider fund raising options

Policy

• RBI MPC Meeting Day-2 
  
• Bank of England Governor Bailey Speaks
  
• FOMC Member Daly Speaks

Tickers to Watch

• AUROBINDO PHARMA entered the biologics contract manufacturing segment with the launch of dedicated biologics CMO, TheraNym.
• BHEL secured a ₹20-25 billion order from Nigeria’s Dangote Petroleum Refinery for eight gas turbine generator packages and signed the project contract.
• HERO MOTOCORP launched its first flex-fuel motorcycles in the 100cc segment—Splendor+ and HF Deluxe—with phased rollout beginning July 2026 in Delhi and parts of Maharashtra.
• HFCL approved multiple transactions to strengthen and consolidate its defence and aerospace business through HFCL Advance Systems.
• IDEAFORGE TECHNOLOGY approved fundraising of up to ₹5 billion through equity and other instruments.
• INDIABULLS approved fundraising of up to ₹10 billion through preferential issuance of convertible warrants.
• INDIAN ENERGY EXCHANGE reported an 18.6% year-on-year rise in electricity traded volume to 12,983 million units in May.
• INTERGLOBE AVIATION (INDIGO) suspended flights to and from Kuwait until June 4 due to airspace closure; government approved a ₹100 billion ATF Price Stabilisation Fund for airlines.
• JAIN IRRIGATION SYSTEMS commissioned an industrial-scale biochar facility in Jalgaon, Maharashtra.
• LENSKART informed that SoftBank’s SVF II Lightbulb sold 57 million shares at ₹508.55 apiece; Societe Generale and Goldman Sachs acquired 14 million shares each.
• MASTEK received a final income tax assessment order for FY23 involving additions of ₹1.24 billion.
• NBCC secured new work orders worth ₹0.83 billion, including a ₹0.40 billion residential project from Canara Bank in Mumbai.

Must Read

• Using Monetary Policy’s Degrees of Freedom
  
• AI Doesn't Take Toilet Breaks, It Doesn't Spend Money Either
• Why There Will be No Single Model of Future War?
• External Stress Needs a Monetary Anchor
• Tata Consumer Has Outgrown Its Acquisition Narrative
• US Alleges India, Others of Forced Labour, Proposes New 12.5% Tariffs
• Crop Output Targets For 2026-27 Are Out, But Are They Realistic?
• H-1B Crackdown on Indian Workers Erodes a Texas Real Estate Boom
• India’s ‘Cockroach’ Army and the Great Exam Betrayal
• Why Amazon Has Struggled to Crack India

See you tomorrow with another edition of The Morning Edge.

Have a great trading day

RBI Should Wait Before it Tightens Policy

The question facing the RBI isn't whether inflation is rising.

It's whether rising inflation is enough to justify tighter policy right now.

Indranil Pan writes, with growth risks building, oil markets unsettled and inflation expectations under scrutiny, the next policy decision may be less straightforward than many assume.

What if the most important move in June is the one the RBI doesn't make?

(*Compiled from various media sources)