Global markets opened the week with heightened sensitivity to geopolitical and macroeconomic cross-currents. A pause in the latest tit-for-tat exchanges in the Middle East triggered a jittery market response, coming at a time when stretched valuations in technology stocks and the prospect of rates staying higher for longer were already testing investor conviction.
Oil initially rose when hostilities resumed, reversing much of the declines seen since the U.S.-Iran confrontation began in late February, but prices eased as the prospect of renewed negotiations raised the possibility of an interim resolution. That ebb and flow supported U.S. and European stock futures, while most Asian equity markets remained under pressure amid concerns over high tech multiples and the drag from a firmer dollar.
Investor sentiment has also been dented by growing questions over whether the AI-led surge that has propelled global equities to record territory can be sustained. Market participants are scrutinizing whether the large-scale capital expenditure on AI infrastructure will translate into the returns that justify current valuations. Micron’s upbeat earnings outlook last week reinforced evidence of strong demand for memory chips, yet Apple’s decision to raise prices illustrated the difficulty companies face in passing higher semiconductor costs to consumers.
The dollar held close to a one-year high, creating headwinds for most currencies and exerting particular pressure on the Japanese yen, which was trading at 161.78 per dollar. The yen remains fragile, hanging just inside the 40-year low of 161.96, with intervention by Japanese authorities the primary constraint preventing an immediate breach. Officials stepped into the currency market to defend the yen in late April-early May, but as in earlier interventions in 2022 and 2024, those interventions have not altered the yen’s broader path.
With markets pricing in a Federal Reserve rate hike this year, any meaningful recovery in the yen would likely require a decisive policy move from the Bank of Japan. Absent such action, the currency looks vulnerable to further pressure from a stronger U.S. monetary stance.
What to watch this week
Market participants will be monitoring a number of developments that could influence risk appetite and positioning. One noted item on the calendar is the euro zone sentiment surveys for June - an indicator that could affect European market tone and inform views on growth and policy.
Market pulse
Overall, the combination of geopolitical uncertainty, lingering doubts about the sustainability of the AI investment wave, and the dollar’s resilience are creating a cautious backdrop. Energy markets react to developments that change the probability of protracted conflict, while technology and semiconductor sectors remain sensitive to questions of demand durability and pricing power. Currency markets, particularly the yen, continue to reflect policy divergence and the potential for further official intervention.