Key focus and themes Global Markets Research Foreign Exchange Asia exJapan/Euro Area/Europe Trump's possible diplomacy; Powell; impending tariffs Which of the following most closely matches your expectations for the IsraelIran conflict over the next two weeks? | Fig. 1: Top five top­conviction strategy trades in order (scale 1­5) | | --- | | ★★★★★ | | | Top 5 FX and Rates Trades | | ★★★★★ | | | --- | --- | --- | --- | --- | --- | --- | | Countries | Trade | bp move | bp move from | Target | Timeline | Convi ...

Investment Rating - The report does not explicitly provide an investment rating for the industry but indicates a baseline scenario for the Strait of Hormuz to remain open, suggesting a cautious outlook on geopolitical risks [4]. Core Insights - Geopolitical risks have increased following Israel's attack and Iran's retaliation, with potential disruptions in the Strait of Hormuz posing significant consequences for global oil and LNG supply [4][5]. - Approximately 20% of global oil and LNG supply passes through the Strait, with major producers, including Iran, heavily reliant on this route [4][5]. - The current market assigns a probability of less than 20% for a closure of the Strait, with oil prices potentially surging to $120-130 per barrel in the event of a full closure [1][4]. Summary by Sections Oil Exports and Reliance - The Strait of Hormuz is critical for oil exports, with a total of 21.2 million barrels per day passing through it as of May 2025 [6]. - Countries like Bahrain, Kuwait, and Qatar have no alternative routes, making them particularly vulnerable to disruptions [3][6]. - Saudi Arabia and the UAE have limited pipeline capacities to redirect some hydrocarbon flows, but disruptions would still have a major impact [3][7]. Economic Impact - Hydrocarbon activities account for about one-third of aggregated GCC GDP, with Kuwait being the most reliant and Bahrain the least [7]. - In 2024, net oil and gas current account revenues represented about 21% of GDP, with significant variances across GCC countries [7][11]. - A $10 per barrel increase in oil prices could improve GDP by approximately 2.6% for current accounts and 2.4% for fiscal balances [11]. Sensitivity to Oil Prices - Current higher oil prices, assuming no disruption, could benefit GCC balances due to high sensitivity to price changes [11]. - The report maintains a baseline Brent price forecast of $66 per barrel for 2025, with geopolitical premiums currently adding $10-12 per barrel [11][12]. Conclusion - The report concludes that while risks and uncertainties regarding oil prices and geopolitical stability are present, macroeconomic forecasts for GCC countries remain unchanged for now [17].

Core Viewpoint - The recent U.S. airstrikes on Iran have led to increased interest in defense stocks, with notable momentum observed in the sector as geopolitical tensions rise [1][2]. Defense Stocks Analysis - Northrop Grumman (NYSE: NOC) was not selected as a top stock to watch despite its involvement in the airstrikes, but it remains a key player in the defense narrative [2][3]. - The B-2 Spirit, used in the strikes, costs approximately $2.1 billion per unit and was equipped with 30,000-pound bunker-buster bombs [3]. - Northrop Grumman's shares rose by 1.3% to 1.5% in early trading, slightly outperforming other defense contractors [3]. - Analysts caution that short-term price increases may not lead to sustained budget growth, and Northrop faces $2 billion in cost overruns related to the B-21 Raider program, which could impact earnings but may also position the company for future program successes [4]. Other Notable Defense Stocks - Lockheed Martin (NYSE: LMT) gained approximately 0.5% pre-market, benefiting from its extensive involvement in U.S. military operations and the F-35 program, making it a staple for investors seeking geopolitical hedges [5]. - RTX Corporation (NYSE: RTX), known for producing Tomahawk cruise missiles, saw its stock rise by about 0.6%, highlighting its critical role in U.S. and NATO operations [7]. - General Dynamics (NYSE: GD) also experienced similar gains, being well-positioned to meet increasing demand for munitions, naval systems, and armored vehicles if military operations escalate [9].

Geopolitical Risk & Market Reaction - The market reaction to the US strikes on Iran's nuclear sites was surprisingly muted [1][3] - Poly market estimates a 23% probability of Iran attempting to close the Gulf of Hormuz by July [4] - Successful military action by Israel and the US could give China pause regarding its intentions for Taiwan [9] - The market is balancing the positive aspects of neutralizing Iran against the risks of retaliation [8][10] Economic Factors & Investment Strategies - The market believes it can handle a 10% general tariff and 30% tariff on China, assuming it doesn't worsen [11] - New all-time highs in the S&P are attainable in the next several weeks, barring significant action by Iran [12] - Companies may leverage AI to offset the higher prices resulting from tariffs, increasing efficiency and margins [13][15] - Investment opportunities may lie in the potential users of AI who can significantly increase operational efficiency, rather than solely in AI suppliers [14] Middle East Situation - The damage done to Iran's nuclear capabilities has likely set back their progress towards producing a bomb [6] - Neutralizing the Houthis and securing shipping in the Red Sea and Hormuz are key considerations [5]

Geopolitical Risk & Oil Market Impact - Oil prices initially surged by 10% following Israel's strikes on Iranian nuclear sites, indicating a risk premium situation where prices exceeded fundamental values [1] - The market's reaction, with an initial jump of almost 6% that later reduced to 13%, suggests that the absence of disruption to oil flows is a key factor [2] - The market is closely monitoring Iran's potential response, including possible actions against ships connected to the US, Israel, or Western allies in the Strait of Hormuz [4] - The evaporation of the risk premium is likely until a significant response from Iran occurs [5] Strait of Hormuz & Oil Trade Disruption - The potential closure of the Strait of Hormuz, though not solely decided by the Iranian parliament, remains a concern [3] - Some supertankers have been observed making U-turns near the Strait of Hormuz, signaling potential risk aversion among shippers [5] - Diversions of ships are currently infrequent, but the market is closely analyzing any indications of changes in oil flows [7][8] - Unlike the Red Sea situation, the Strait of Hormuz is crucial for accessing certain oil and LNG shipping ports, making it irreplaceable [8] - A significant avoidance of the Strait of Hormuz by ships would materially impact the amount of oil and gas on the water [9]

Investment Rating - The report maintains a base case for oil prices in the low to mid $60s for the remainder of 2025 and $60 in 2026, despite geopolitical concerns [6][10]. Core Insights - Geopolitical risks have increased due to Israel's attack on Iran, raising the worst-case scenario probability for oil supply disruptions to 17% [3][4]. - The recent spike in oil prices by 5% reflects heightened security risks in the Middle East, with a 7% probability of a worst-case scenario where supply impacts extend beyond Iranian exports [6][10]. - The US aluminum tariffs have created significant uncertainty in the aluminum market, with the US Midwest premium (MWP) currently insufficient to incentivize necessary imports [7][10]. Oil Market Summary - Global oil demand averaged 103.9 million barrels per day (mbd) in June, showing a year-over-year increase of 560 thousand barrels per day (kbd) [10]. - Total liquid inventories surged by 34 million barrels (mb) in the first week of June, with crude oil stocks rising by 27 mb [10]. - An attack on Iran could potentially spike oil prices to $120, impacting US Consumer Price Index (CPI) to 5% [6]. Aluminum Market Summary - The surprise increase in US aluminum tariffs to 50% has led to a sideways outlook on aluminum prices, with participants at the Harbor Aluminum Summit expressing uncertainty about future demand [7][10]. - The current MWP is around 60 cents per pound, which barely covers the tariff, indicating a need for the MWP to rise if the tariff remains unchanged [10]. - Existing inventory can buffer the market temporarily, but it will deplete quickly, leading to potential price increases if the tariff situation does not change [10]. Metals Activity Summary - China's steel output has slowed sharply, reaching its lowest rate since 2018, with a 5% drop compared to previous months [9]. - The annualized run-rate of steel production in China is at 967 million tons (Mt), suggesting a potential peak in production for 2025 [9].

Market Risk & Geopolitical Factors - Equity markets are experiencing nervousness potentially due to Middle East tensions and potential US involvement [1] - Low liquidity is hindering aggressive trading, with the market drifting and awaiting the next major catalyst [3] - A negative surprise catalyst is deemed more likely given optimistic pricing on trade and the tax bill [3] Central Bank Policies & Currency Dynamics - The Fed's message regarding stagflation risks is slightly negative for stocks and the dollar [2][10] - The Swiss National Bank (SNB) is being watched for a possible move to negative interest rates [4] - The Swiss franc is viewed as a financial asset similar to gold, serving as a portfolio diversification asset [5][6] - Geopolitical factors, not fundamental inputs, primarily drive the Swiss franc [8] Dollar Performance - The dollar's recent strength is marginal, around 01% [9] - The Fed's stagflation message is not particularly positive for the dollar, and the short squeeze appears to be losing momentum [10] - The world is structurally overexposed to the dollar [10]

Geopolitical Impact on Oil Prices - Oil prices have moved dramatically higher due to geopolitical tensions, with the current price movement largely attributed to a geopolitical premium [2] - The market is highly reactive to geopolitical headlines, causing volatility as traders assess the implications for supply and oil prices [4] - Current oil prices are around $74, and while higher than the $60-65 range before the geopolitical events, they are not yet at levels indicating supply interruption concerns [3][4] OPEC+ and Market Dynamics - OPEC+'s decision to bring forward supply surprised market participants, potentially preventing even higher oil prices [6] - Political considerations play a significant role in OPEC+ decision-making, particularly in maintaining group cohesion [7][8] - OPEC+ initially believed the market could absorb increased barrels until the first half of the year, but geopolitical concerns have altered this outlook [9] - OPEC still possesses considerable spare capacity that could be brought online, though escalating conflict impacting production and export facilities could drive prices even higher [10]

FOR THE CONVERSATIONS THAT MATTER AND THE INSIGHTS YOU NEED, LET'S GET STARTED. ♪ >> NEWSMAKERS AND MARKET MOVERS, THIS IS THE PULSE WITH FRANCINE LACQUA. FRANCINE: GOOD MORNING AND WELCOME.I'M FRANCINE LACQUA IN LONDON. IRAN SAYS THE HEAD OF ITS ARMED FORCES AND SIX OF ITS NUCLEAR SCIENTISTS HAVE BEEN KILLED IN A WAVE OF ISRAELI AIRSTRIKES. ISRAEL SAYS 200 WERE PLANTED 100 TARGETS IN IRAN WITH THE AIM OF PREVENTING IT FROM BEING ABLE TO MAKE A NUCLEAR WEAPON.ISRAEL SAYS IRAN HAS RESPONDED BY LAUNCHING MORE ...

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