The escalation of the Israel-Iran conflict on the weekend has significantly added to existing geopolitical risks, while next week's NATO summit (24-25 June), the approaching deadlines on 'reciprocal' tariffs globally (8/9 July), on China tariffs (12 August), and domestic pressures for the One Big Beautiful Bill to pass before August all promise to generate tensions and headlines in the coming weeks. But the most crucial event to watch out this week will be how the middle east crisis plays out. Further escalation depends upon how Iran chooses to retaliate & then how Israel & US decide to counter retaliate. But to us the end game is that a much weaker Iran after making some counter strikes will settle down to negotiations and this war will also remain a low intensity war between Iran & Israel. We don’t believe the current regime in Iran is likely to attack US bases in middle east on a large scale basis as it might lead to further large-scale attacks from US which could cost it a regime change too. We also don’t believe Strait of Hormuz can be closed on a sustained basis as several Iranian allies use this route to supply crude to end consumers. Iran itself exports it’s own crude through this route. Any adverse event in Strait of Hormuz will be duration should be short, as all efforts would focus on a reopening, so that it should not be a multi-month closure. Any disruption to Iranian crude exports could have a smaller price impact than expected as there lies a spare capacity of 4 mbpd with Saudi and another 1.5 mbpd with other OPEC+ members. We believe Brent might open around 85$ level tomorrow but as the week progresses & if Iran resists from attacking US, Brent should cool down to 70-75 levels as geopolitical risk premium settles down. In case our assumption is wrong & Iran actually attacks strait of Hormuz we can expect Brent to cross 100$ levels easily but it will be a short-lived spike as Arab allies will ask Iran to scale down it’s attacks in this sensitive zone. In US macro data this week, we have consumer confidence, core PCE for May (our estimate .14% MoM), durable goods orders & Q1 GDP 3rd print. There is also auction supply of 69 BN USD of 2 year notes on Tuesday, 70 BN USD of 5 year supply on Wednesday & 44 BN USD supply of 7 year supply on Thursday. Fed Chair Powell will deliver his semi-annual testimony to the House Financial Services Committee on Tuesday and the Senate Banking Committee on Wednesday. Echoing his news conference remarks, Powell is likely to emphasize that uncertainty about the outlook remains elevated, FOMC participants don’t have strong conviction in their rate projections, and that — with the labor market still solid — it’s appropriate to hold rates while the committee assesses the effects of tariffs over the summer. In RoW data, we have Canada CPI for May on Tuesday expected at 0.5% MoM, Australian CPI for May on Tuesday expected at 2.4% YoY & Tokyo CPI for June on Friday expected at 3.3%. In US fiscal events, considering the significant differences between the Senate and House versions of the OBBB Act, it will likely take some time for the Republicans to forge a consensus. It’s likely that final passage of the bill will be delayed beyond the self-imposed 4 July deadline. Considering that an increase in the debt ceiling is tied to the bill, a significant delay or potential failure of passing it could raise volatility in financial markets.
