How are markets reacting to US strikes on Iran's nuclear facilities?

US markets close mixed amid Iran intervention concerns

US equity markets closed mixed on Friday in cautious trading ahead of potential US intervention in the Iran-Israel conflict. For the week, the US 500 (S&P 500) finished 0.15% lower, while the US Tech 100 (Nasdaq 100) fell 0.02% and the Wall Street added 9 points (0.02%).

US strikes Iranian nuclear sites over weekend

These concerns proved well-founded after the US conducted strikes with B-2 Stealth Bombers on three Iranian nuclear sites over the weekend and has since claimed the attacks "obliterated" Iran's nuclear capabilities. The US insists the strikes were aimed at halting Iran's nuclear ambitions, not regime change, but Trump's rhetoric suggests openness to further action. From Israel's perspective, it may push for additional US support to ensure Iran's nuclear program remains crippled and a more friendly regime in Iran is installed.

Iran vows response and potential retaliation

Iran has vowed to respond, with officials warning of "everlasting consequences." Possible actions include missile or drone strikes on US or Israeli targets, cyberattacks, or asymmetric attacks via proxies like Hezbollah or Houthi rebels, though their capabilities are weakened.

Risks to global trade and historical context

Iran may also consider disrupting global trade by closing the Strait of Hormuz; however, we continue to think that this is unlikely due to its impact on its main customers, China and India. With that last point in mind, we highlight that while most flashpoints in the Middle East over the past five decades generally cause only temporary spikes in crude oil prices, the largest and longest-lasting increases typically arise from regime changes.

At this point, the market response has been one of caution as we await further details on what comes next and, more precisely, what the response from the Iranian regime will be.

Oil prices surge, equity futures dip and safe haven demand

WTI Crude oil futures opened at $78.00, hit a high of $78.40, and have since eased to $75.92 (+1.29%). US 500 equity futures are down 0.35%, at 5997 following their reopening. The US dollar is modestly bid against the Japanese yen at 146.40 (+0.2%), likely partly due to Japan being a large energy importer. Meanwhile, Bitcoin is back trading above $100k after a dip to $98,420 early this morning.

Key data to watch this week

Looking ahead, beyond assessing the fallout from the weekend's events in Iran, US equity markets may begin to feel the impact of month-end and quarter-end rebalancing flows, which are suspected to involve selling of US stocks and the buying of bonds.

On the data front, there will be keen interest in key data, including the Flash PMIs, Durable Goods, and the Fed's preferred measure of inflation, the Core PCE price index previewed below. It is important to note that the PCE inflation data precedes the 24.5% rise in crude oil prices this month.

Core PCE price index

Date: Friday, 27 June at 10:30pm AEST

In April, the headline PCE price index rose by 2.1% YoY, the lowest level in seven months and below market expectations of 2.2%. The Fed's preferred measure of inflation, the core PCE price index, increased by 2.5% YoY, slowing from a 2.7% rise in March, for its smallest gain since March 2021.

At last week's FOMC meeting the Fed kept rates on hold as widely expected within a range of 4.25% to 4.50%. Powell emphasised a wait-and-see approach, citing uncertainties about the inflationary impacts of President Trump's tariffs and the risk of stagflation.

On Friday night, Fed Governor Waller stated in an interview that he could foresee the Fed cutting rates "as early as July." He believes tariffs will not have a persistent impact on inflation and clarified that he does not think the Fed needs to wait for labour market weakness before cutting rates.

We believe that the US rates market is under-pricing the risk of an imminent dovish pivot from the Fed and a July rate cut, earlier than the September meeting the market currently expects. Our belief here is due to mounting risks to growth and employment coming from US trade policy and Middle Eastern geopolitical uncertainty.

For May, the preliminary expectations is for the headline PCE price index to rise to 2.2% YoY, while the core measure is expected to rise to 2.6% YoY. The US rates market starts the week 75% priced for a 25bp Fed rate cut in September and there is a cumulative 50bp of Fed rate cuts priced in between now and year end.

Core PCE price index chart

US Tech 100 technical analysis

Post the US Tech 100's surge higher on the 12th of May, we have been working with the view that the rally in the US Tech 100 from the 21st of April 17,592 low is a Wave III (Elliott Wave) that should be followed by a Wave IV pullback.

While it is possible that a Wave III high is in place at the recent 22,041 print, a break of support at 21,500/450ish is needed to confirm this and that Wave IV pullback is underway back towards support coming from the 200-day moving average 20,800/500 area. Providing this support band holds it should then be followed by another leg higher for Wave V.

A sustained break below the 200-day moving average would be an indication of a possible double top formation and warn that a deeper pullback is underway.

US Tech 100 daily chart

US 500 technical analysis

Post the US 500's surge higher on the 12th of May, we have been working with view that the rally from the 21st of April 5101 low was a Wave III (Elliott Wave) that should soon be followed by a Wave IV pullback.

While it is possible that a Wave III high is in place at the recent 6059 high print, a break of support at 5950/20ish is needed to confirm this and that Wave IV pullback is underway towards the 200-day moving average at 5815 and the late May low of 5767.

Providing the 5815/5770 support area holds, it should then be followed by another leg higher for Wave V, to retest the record 6147 high.

US 500 daily chart