Equities wobble as traders watch Middle East tension

Bengaluru — Global stocks wavered and oil prices rose on Tuesday, as conflict between Israel and Iran entered its fifth day, while the yen was choppy after the Bank of Japan decided to slow the pace of reduction in its bond purchases from April next year.

The Bank of Japan (BoJ), which left its short-term interest rates at 0.5% as expected, decided to leave unchanged its bond taper plan that runs through March 2026, but set out a new plan beyond next April.

The yen swung between small gains and losses to stand at ¥144.80 against the dollar as investors’ focus switches to a 6.30am GMT press conference by BoJ governor Kazuo Ueda to explain the decision.

Heightened uncertainty and escalating air conflict in the Middle East drove investors to traditional safe-haven assets, as a rise in US treasuries pushed yields lower across the curve, while gold steadied after a 0.5% rise earlier.

MSCI’s broadest index of Asia-Pacific shares outside Japan edged up 0.2%, while China and Hong Kong equities slipped 0.1% each.

Markets feared that conflict between Tel Aviv and Tehran could spill over in the broader oil-rich Middle East. Oil markets’ reactions have been the most volatile, while stocks and currencies have been more guarded.

US President Donald Trump urged everyone to evacuate Tehran and cut short his visit to the Group of Seven (G7) summit in Canada, while a separate report said he had asked for the national security council to be prepared in the situation room.

The developments sparked a wave of risk-off moves in which S&P 500 futures fell 0.3%, European futures dropped 0.6%, while crude prices briefly jumped more than 2%.

“Suspicion is that we’re about to see the US begin some sort of military action in Iran and we’re now seeing some risk aversion because it brings another element of uncertainty,” said Tony Sycamore, a market analyst at IG.

Wall Street closed higher on Monday after sources told Reuters that Iran was seeking a Trump-mediated immediate ceasefire with Israel, which also cooled a rally in crude prices.

The air war between Iran and Israel, the longtime enemies’ biggest battle ever, escalated on Monday, with Israel targeting Iran’s state broadcaster and uranium enrichment facilities.

Fed decision awaited

In a week filled with central bank meetings, the spotlight next turns on the Federal Reserve.

The US central bank is expected to hold rates steady on Wednesday but the focus yet again will be on the path Fed chair Jerome Powell charts for future rate cuts as policymakers try to navigate Trump’s erratic tariff policies and their global impact.

Traders are pricing in two cuts by the end of the year.

“To be a central banker right now is one challenging job and on top of the tariff situation, the trade policy and the inking of deals before deadlines you have this uncertainty from the Middle East,” said IG’s Sycamore.

“Macro backdrops don’t get any more tricky than what we’re seeing.”

Investors also monitored developments on trade deals with Trump’s early July deadline on tariffs fast approaching.

Talks between Japan and the US on the sidelines of the G7 summit fell short of a breakthrough to lower or eliminate tariffs, while a deal with Britain left unresolved the issue of steel and aluminium duties.

In commodities, crude futures were up about 0.4% at around $72 a barrel, while gold prices were flat at $3,384.05/oz.

In fiscal 2026, the BoJ plans to reduce monthly bond buying by ¥200bn each quarter to take the size of purchases down to about ¥2-trillion by March 2027.

A slowdown in tapering effectively signals a dovish shift and offers support to the Japanese government bond (JGB) market, shaken by weak demand at recent auctions and a surge in super-long yields to records last month.

The next test for markets will be an auction of 20-year JGBs on June 24.

Reuters