Morning Bid: Relief at two-week Middle East window

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By Mike Dolan
LONDON (Reuters) -What matters in U.S. and global markets today
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Last month's China-U.S. trade showdown turned world markets' focus to Geneva, and that's where attention is yet again, only this time for European talks with Iran, as President Donald Trump has delayed a decision on direct U.S. involvement in the Israel-Iran war to allow a two-week window for negotiations.
It's Friday, so I'll provide a quick overview of what's happening in global markets and then offer you some weekend reading suggestions away from the headlines.
Today's Market Minute
* Iran said on Friday it would not discuss the future of its nuclear programme while under attack by Israel, as Europe sought to draw Tehran back into negotiations and the United States considers whether to get involved in the conflict.
* Investor unease about an increasingly uncertain environment is rising, as Norway's shock rate cut on Thursday highlights how U.S. tariffs, Middle East conflict and a shaky dollar make global monetary policy and inflation even harder to predict.
* The Federal Reserve took a slightly hawkish turn on Wednesday, indicating it is worried more about rising inflation than slowing growth. But Chair Jerome Powell suggested this outlook should be taken with a large grain of salt, writes ROI markets columnist Jamie McGeever.
* UK finance minister Rachel Reeves insists higher economic growth is her top priority, but the government's current plan to address the country's chronically low investment is unlikely to be ambitious enough. What may be needed is a structural rethink of the finance ministry itself, argues Mike Peacock, the former head of communications at the Bank of England.
Relief at two-week Middle East window
Even though U.S. markets were closed for the Juneteenth holiday on Thursday, Wall St futures fell sharply during the day as tensions over the Israel-Iran war boiled.
But those losses were mostly reversed before the market re-opened on Friday after Trump gave Tehran a fortnight to come up with a compromise before he decides whether to add U.S. firepower to Israel's air attacks on Iranian nuclear installations. Drone and missile attacks between the two warring sides continue, however.
As is always the case with Middle East conflicts, the price of oil is the lodestar. Iran is OPEC's third-largest producer.
U.S. crude came within a whisker of five-month highs on Thursday before falling back today to just over $75 per barrel. While a major concern, the rise in energy prices is still shy of a "shock", with crude prices down 7% year-on-year despite the tense situation.
Foreign ministers from Britain, France and Germany along with the European Union's foreign policy chief were due to meet their Iranian counterpart Abbas Araqchi in Geneva on Friday to try to de-escalate the conflict.
If Trump goes to the wire with his decision about direct U.S. involvement in the war, this will coincide with the expiration of his 90-day pause on "reciprocal" tariff hikes across the world, further fogging up the windscreen for world markets.
Treasury yields were steady going into Friday's open, as investors juggled the energy picture and this week's relatively hawkish Federal Reserve meeting. The dollar fell back from Thursday's highs.
While the median forecast from Fed policymakers is still two interest rate cuts over the rest of the year, inflation forecasts were nudged higher and 7 of the 19 central bankers now expect no further easing in 2025.
But confident forecasting is next to impossible now for the major central banks as they try to balance edgy oil prices, uncertain tariff hikes and multiple geopolitical risks. The Bank of England and Bank of Japan also left their key policy rates unchanged this week, largely for those reasons.
Two rate cuts did emerge this week, however.
Swiss interest rates returned to zero as expected as the Swiss National Bank battles the deflationary effects of currency strength, largely due to the franc's "safe haven" appeal. Norway surprised with a quarter point cut as well, taking the heat out of an oil-driven crown that had hit two-year highs this week.
Stock markets around the world rallied on Friday as the oil price fell back, with Japan's Nikkei bucking that trend and ending slightly in the red again.
A relatively thin trading session is expected on Wall Street later following the holiday on Thursday, though unfolding events in the Middle East will continue to create considerable trepidation before the close. The Philadelphia Fed's June business survey tops the data diary.
Next week's events are led by Fed boss Jerome Powell's semi-annual congressional testimony on Tuesday and Wednesday and the release of the Fed's favored inflation gauge - the personal consumption expenditures measure - on Friday. A NATO summit in The Hague on Wednesday adds to the geopolitical focus.
Elsewhere, sterling was firmer in the wake of the BOE decision, even with a surprisingly poor UK retail sales readout for May.
There was some marginally better news from UK public borrowing numbers. While slightly above forecasts for May, the government has borrowed 37.7 billion pounds over the first two months of the 2025/26 fiscal year, less than the 40.7 billion pounds the Office for Budget Responsibility had predicted.
In China, foreign direct investment from January to May fell 13.2% from the same period last year, more than had been forecast.
And the European Union said it will bar Chinese companies from participating in EU public tenders for medical devices worth 60 billion euros or more ($68.9 billion) per year after concluding that EU companies are not given fair access in China.
Weekend reading suggestions
* MONETIZING DEBT: With no end in sight for outsize U.S. deficits and debt accumulation, the Fed "will almost certainly" be forced to monetize enough federal debt to prevent a default at some point, according to former Bank of England policymaker Willem Buiter and Professor Anne Sibert. Higher inflation and interest rates "are all but assured", they wrote in a column on Project Syndicate. "The Fed will have no choice but to engage in sovereign debt purchases that it knows to be incompatible with its monetary-policy objectives," they concluded. "The inflation surge could be no more than three years away."
* EMOTIONAL FED?: Central bank communication is one of the most closely watched signals by markets, but it is not just what is said, but how it is said, argue economists Dimitris Anastasiou, Apostolos Katsafados, Christos Tzomakas and Steven Ongena in a paper on CEPR's VoxEU site. "Even subtle emotional cues can shift expectations and pricing behaviour in financial markets," they wrote. "Portfolio managers, particularly in the banking sector, may need to recalibrate models to include emotional tone as a market-moving variable."
* US FIRMS MUSCLE IN: U.S. defense giants, backed by a Congressional delegation, used this week's Paris Airshow to showcase their cutting-edge technology and court European partners as they seek to tap into the rising regional military spending. Reuters' Joe Brock, Giulia Segreti, Paul Sandle and Tim Hepher show how despite the pledges by many European nations to boost military self-sufficiency, the continent remains heavily reliant on U.S. defense firms such as Lockheed Martin, Raytheon, Boeing, Anduril, Palantir and Elon Musk's SpaceX.
* G6-PLUS?: President Trump's early departure from this week's G7 summit in Canada left the group without an overarching agreed communique and raised questions about the future shape of the group. Writing on the Chatham House site, the RIIA's economy and finance director Creon Butler outlines different formats that could be considered, including "G6-plus" without the full attendance of the United States or "G7-plus" with invited guests and limited issue-specific statements.
* REFINING OKLAHOMA: Nestled beneath Oklahoma's Wichita Mountains sits a warehouse containing the only machine in the United States capable of refining nickel, a crucial energy transition metal now dominated by China. President Donald Trump has said he wants to boost U.S. production of minerals and, as Reuters' Ernest Scheyder shows, Oklahoma's push into minerals processing marks a turn in efforts to wean America off Chinese rivals. The state houses the country's only nickel refinery, its largest lithium refinery, two lithium-ion battery recycling plants, a rare earths magnet facility, and several electronic waste collection facilities. That's more than in any other state.
Chart of the day
During the parade of central bank meetings this week, Swiss interest rates returned to zero, and Norway's central bank surprised markets with a quarter point cut. Both decisions were currency-related and have been influenced by the swooning dollar and rising geopolitical tensions. The supercharged Swiss franc has drawn safe-haven demand and threatens Switzerland with deflation, as it flirts with 10-year highs against the green back. The Norwegian crown is highly linked to the oil price and hit its strongest level in two years this month as crude shot higher on Middle East worries. The major central banks all held the line, largely due to growing uncertainty over trade, oil prices and war.
Today's events to watch
* Philadelphia Federal Reserve's June business survey (8:30 a.m. EDT), May leading indicator (10:00 a.m. EDT); Canada May house prices, retail sales and producer prices (8:30 a.m. EDT)
* European foreign ministers meet Iranian counterpart in Geneva
* European Union finance ministers meet in Luxembourg, European Central Bank Vice President Luis de Guindos attends
* U.S. corporate earnings: Accenture, Kroger, Carmax, Vertex Pharmaceuticals, Darden Restaurants
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
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(By Mike Dolan; Editing by Anna Szymanski)