Global financial markets witnessed a historic moment on the last trading day of May. US President Trump stated on Friday (May 29th) that he would go to the White House Situation Room to make a "final decision" on a potential agreement between the US and Iran. With markets anticipating a deal between the US and Iran, the resumption of normal navigation in the Strait of Hormuz, and further easing of tensions in the Middle East, major global asset prices reacted swiftly: international oil prices plummeted, the three major US stock indices hit new record highs, demand for the US dollar as a safe haven cooled, and Bitcoin retested the $74,000 mark.

Market analysts generally believe that if the agreement is ultimately approved by Trump, the geopolitical risks in the Middle East that have persisted for months may see a temporary easing, and global investors' focus will shift back to economic growth, corporate profits, and a new investment cycle driven by artificial intelligence.

Due to persistently strong market expectations for a full reopening of shipping routes between the US and Iran, international oil prices have already plummeted by more than 17% this month, and Brent crude is experiencing its second consecutive weekly drop of at least 8%.

Stock Market: Major Indices Hit Record Highs During Trading; Dell Soars 29%, Igniting AI Frenzy

In contrast to the dismal performance of the oil market, the US stock market staged a spectacular "May coronation" on Friday, with all three major indices simultaneously hitting record highs during trading.

In the foreign exchange market, as geopolitical tensions eased, the US dollar index, a classic safe-haven asset, fluctuated narrowly on Friday, but its weekly chart inevitably turned bearish.

Last Week's Market Performance Review:

At the end of last week, the three major US stock indices diverged. The Dow Jones Industrial Average hit a record high during trading, marking its first record high since the outbreak of the Iran war. The AI ​​boom continued to drive the technology sector higher, while market optimism regarding potential progress in US-Iran negotiations significantly boosted risk appetite. However, oil prices, the dollar, and global inflation risks remained highly volatile, indicating that the market remained highly vigilant about the situation in the Middle East. The Dow Jones Industrial Average hit a record high during trading. The Dow Jones Industrial Average rose 420 points, or 0.8%, successfully breaking through the all-time high of 50,512.79 points set on February 10. Earlier, the Dow had already reclaimed the 50,000-point mark.

Last week, spot gold continued its rebound as traders closely assessed the latest prospects for a possible deal between the US and Iran. Spot gold rebounded strongly after hitting a two-month low of $4,366 on Thursday, reaching a high of $4,595.35 per ounce during the day.

Silver prices rose to $76 per ounce last week and are expected to rise more than 3% this month, as investors weighed the potential extension of the US-Iran ceasefire against persistent inflation concerns and expectations of prolonged high interest rates. UBS recently lowered its silver supply deficit forecast from 300 million ounces to 60-70 million ounces and its full-year investment demand outlook from over 400 million ounces to 300 million ounces.

Over the past week, the US and Iran engaged in both fighting and negotiations. A proposed ceasefire reduced safe-haven demand, causing the US dollar to retreat from its highs and close down 0.4% for the week. Ultimately, it reversed course and fell below 99, closing at 98.92, after news broke that the US and Iran were extending the ceasefire agreement. US inflation hit a three-year high, and the economic outlook was revised downwards, leading to increased hawkish sentiment at the Federal Reserve. The yen approached the 160 warning line, the New Zealand dollar rebounded strongly, and expectations for a European Central Bank rate hike intensified, pushing the currency market into a period of high volatility.

The euro saw limited fluctuations last week, rising slightly against the US dollar to close at 1.1660 for the week. ECB Governing Council member Pereira stated that the Middle East conflict will have a significant impact on price trends in the Eurozone, and the central bank will focus on second-round inflation at its June meeting. The yen faced significant depreciation pressure last week. A shift in market sentiment pushed the dollar to 159.65 against the yen on Thursday, its highest level since April 30, just shy of the 160 level that triggered Japanese intervention last month. Japan's high exposure to the energy crisis continues to weigh on the yen.

The pound accelerated its rise against the dollar, breaking through 1.3480 on Thursday to a three-day high, before settling around 1.3450 at the weekend. The pound's further recovery was driven by a sell-off in the dollar amid improved geopolitical conditions and a general buying preference for risk assets. The Australian dollar rose against the US dollar on Friday, approaching the 0.7180 area, while the dollar came under pressure, as market sentiment improved on expectations of a more lasting ceasefire between the US and Iran. Investor sentiment improved after US media reported that Washington and Tehran had reached a memorandum of understanding to extend the ceasefire for 60 days, reopen the Strait of Hormuz, and begin nuclear negotiations.

Last week, the US and Iran continued negotiations on Iran's nuclear program. However, Iran's Tasnim News Agency reported that the agreement has not yet been finalized or officially confirmed. Affected by this latest development, international oil prices fell. WTI crude oil is currently fluctuating around $85-86 per barrel and is on track for its first monthly decline in five months. Nevertheless, with current oil prices still far above pre-war levels, concerns about inflation persist.

The convergence of several positive factors—record highs in global stock markets, oil prices falling to multi-month lows, and the possibility of an extension of the ceasefire agreement between the US and Iran—failed to boost Bitcoin prices. On Friday (May 29), Bitcoin continued to consolidate at low levels after three consecutive days of sharp declines, currently trading around $73,500, with an overall weak trend. As of now, Bitcoin, the world's largest cryptocurrency, is still hovering around $73,000, having fallen nearly 6% cumulatively. Market analysts point out that institutional buyers are currently more focused on clear signals from US regulators than on short-term changes in macroeconomic news.

The yield on the 10-year US Treasury note hovered around 4.45% on Friday, near a three-week low. In the interest rate market, speculative institutions significantly adjusted their net short positions in US Treasury futures. Most notably, speculators reduced their net short positions in 2-year Treasury futures by 305,000 contracts, bringing the total net short position down to 1,255,246 contracts. Simultaneously, the net short position in 10-year Treasury futures also decreased by 60,098 contracts, falling to 787,954 contracts. Overall, market sentiment regarding interest rate trends is not one-sided, but rather exhibits a pattern of "short-term bearish sentiment receding, while long-term bearish sentiment remains."

Market Outlook for This Week:

This week (June 1-5), global markets will experience a period of concentrated data releases. Key indicators such as manufacturing PMIs from core economies, US non-farm payroll data, and European inflation data will be released, coupled with frequent statements and key policy signals from central bank officials worldwide. The market will seek direction amidst the interplay between economic fundamentals and policy expectations.

In particular, the concentrated release of PMI data will directly impact the central price level of the equity market, while the US non-farm payroll data is crucial for the Federal Reserve's policy path assessment. Each data point and event can potentially trigger significant asset price volatility. Investors need to focus on the breakdown of core data components and changes in policy signals to proactively address potential risks and opportunities.

Regarding this week's risks:

Data exceeding expectations and policy shifts require close attention.

In addition to core economic data, investors should be wary of three potential risks: First, if key data such as the global manufacturing PMI and US non-farm payrolls significantly exceed or fall short of expectations, it could trigger short-term volatility in equity, foreign exchange, and commodity markets;

Second, if speeches by central bank officials such as the Federal Reserve and the European Central Bank signal a policy shift, it could quickly correct market pricing, leading to increased volatility in corresponding currencies and bonds;

Third, if geopolitical conflicts and international trade frictions (such as the US-Israel conflict and the Russia-Ukraine conflict) escalate again, it will trigger increased risk aversion, raising the risk premium for oil prices and suppressing gold prices.

This week's conclusion:

Developments in the Middle East situation improved market sentiment, reducing demand for safe-haven assets. The US dollar index fell to around 98.90 before the end of last week, despite Thursday's release of the US core personal consumption expenditures (PCE) price index, which remained stable at 3.3% year-on-year in April, reinforcing expectations that the Federal Reserve might maintain higher interest rates for a longer period. Investors were focused on reports of a memorandum of understanding between the US and Iran, which included extending the ceasefire for 60 days, reopening the Strait of Hormuz, and initiating nuclear negotiations.

The Fed's new cycle faces key challenges; coordination with the Treasury is crucial.

Kevin Warsh has been officially sworn in as Chairman of the Federal Reserve, marking the beginning of a new policy cycle. Given the high US fiscal deficit and massive debt, aggressive interest rate hikes could create a vicious cycle, ultimately hindering inflation control. Monetary policy alone is insufficient for long-term price stability; coordinated fiscal policy is essential. Coupled with uncertainties arising from supply disruptions, the Fed will remain cautious in its subsequent interest rate decisions.

The logic of interest rate hikes has hidden dangers; high debt amplifies policy side effects.

Under the government's comprehensive balance sheet, the coordination between monetary and fiscal policies is the biggest test facing the new Federal Reserve.

With the US fiscal deficit continuing to rise, aggressive interest rate hikes to suppress inflation at this time are likely to have the opposite effect. Interest rate changes directly impact government finances. After the Federal Reserve raises rates, the refinancing cost of existing US debt increases, leading to a significant increase in government interest payments and forcing the Treasury to increase bond issuance to fill the gap.

This transmission chain will continuously push up interest income for the private sector, with most of the gains flowing to domestic pension funds and corporations. In the short term, interest rate hikes can suppress market demand and temporarily lower inflation, but private sector nominal wealth increases accordingly. Once the economy reaches full employment, the increased wealth is converted into consumption, and inflationary pressures will rise again. Given the high level of government debt, aggressive interest rate hikes may actually exacerbate inflationary risks in the long run.

Policy coordination is imperative; a single tool is insufficient to control inflation.

Relying solely on interest rate tools cannot achieve long-term stable inflation control; the cooperation of fiscal policy is indispensable. The Federal Reserve has proactively communicated with the US Congress, truthfully interpreting the chain effects of various fiscal measures, and advocating for balanced policy implementation to alleviate inflation while avoiding dragging down the overall economy.

In response to Warsh's view that improving productivity would improve the economy and inflation, Andorfato stated bluntly that development visions are not equivalent to implemented policies. Current supply shocks make inflation uncertain, giving the Federal Reserve reason to remain cautious and postpone interest rate hikes. He emphasized that the Fed should communicate with Congress objectively and rationally, clearly explaining the impact of fiscal adjustments on interest rates and inflation, while respecting Congress's decision-making authority and promoting corresponding fiscal reforms. This is the fundamental path to resolving inflation.

Conclusion:

With the Fed entering a new phase under Warsh's leadership, both the external environment and internal constraints have become more complex. The continuously expanding US fiscal deficit and high debt have significantly reduced the scope for monetary policy, and the drawbacks of aggressive interest rate hikes are becoming increasingly apparent. Going forward, the Fed must not only flexibly adjust interest rates to address inflation fluctuations but also promote synergy between monetary and fiscal policies. Balancing multiple objectives and breaking down policy barriers will be a core long-term test for the new Fed.

Is the US Treasury yield "false drop" or a "real drop"? Geopolitical Easing vs. Structural Pressures

Last week, US Treasury yields fell across the board, boosted by progress in US-Iran negotiations and improved risk appetite. The 10-year Treasury yield fell nearly 5 basis points to 4.507%, and the 30-year Treasury yield fell about 3 basis points to 5.033%.

However, the market had just experienced an extreme repricing of interest rate hikes the previous week—the 30-year Treasury yield touched 5.2%, the highest since 2007; the 10-year yield approached 4.7%. The 2-year Treasury yield remained stable above 4.1%, well above the upper limit of the Fed's 3.50%-3.75% target range, indicating that the market is still pricing in interest rate hikes.

Bond Vigilantes "Threaten": They Will Do It for the Fed If It Doesn't Tighten

Bond vigilantes are gathering: if the Fed does not proactively tighten credit conditions, they will "maintain economic order" by selling bonds to push up yields.

Newly appointed Chairman Warsh may be forced to raise interest rates in July to establish market credibility; a slow response to inflation signals could trigger greater market turmoil. However, Warsh's hawkish stance in the early stages of his term could unexpectedly lower mortgage rates and ease corporate financing pressures by suppressing long-term yields, thus achieving the White House's economic goals.

Interest rates "could easily continue to rise," and the US faces the refinancing pressure of $30 trillion in debt (approximately $2 trillion to be addressed this year). The market may be underestimating the structural impact of the shift from "excess savings" to "insufficient savings." Dimon criticized the market for being overly optimistic—assuming a smooth resolution to the Middle East situation, but with geopolitical risks not truly dissipating, upward pressure on interest rates will persist.

Economic Data: Rising Inflation and Resilient Consumption Coexist

Amid rising US Treasury yields, the latest data shows inflation is rising during the US-Iran conflict, while other economic data indicates the economy remains resilient in the face of rising oil prices.

On the price front, wholesale prices surged 6% in April, mainly driven by rising energy prices. The latest Consumer Price Report showed that inflation is widening as rising oil input costs are passed on to consumers. On the employment front, 115,000 jobs were added in April, and March's job growth was revised upward by 7,000 to 185,000, reversing the weak start to the year (job losses).

Other indicators show that consumers continue to spend. In the week ending May 16, the Redbook same-store retail sales index jumped 8.9%, confirming the previous week's surge of 9.6%, well above the 5.8% average for the whole of 2025.

Market Expectations Shift: From Rate Cuts to Hold Off or Even Slight Tightening

This complex dynamic has rapidly changed market expectations for interest rates. According to the CME FedWatch tool, as of May 26, the market's expectation of at least one rate hike before December had jumped from 30% a week earlier to 57%, and the probability of a rate hike in October was also close to 53%. Even more significantly, by March 2027, the market's implied probability of a rate hike had reached a staggering 96.7%, reflecting that the market is pricing in a "higher and longer" or even "continuously tightening" interest rate environment. This reversal was swift and caught many market participants off guard—just two months ago, the market widely expected two to three rate cuts in 2026, but now those expectations have almost vanished. The market narrative has completely shifted from "when will the Fed cut rates" to "whether the Fed will raise rates again."

Philadelphia Fed President Anna Paulson—a voting member of this year's FOMC—stated publicly last week that the market has begun to consider the possibility of rates remaining unchanged or even rising later, and that this market trend is "benign" and "healthy." Paulson's statement clearly confirms that the Fed is shifting its mindset from "the next step is a rate cut" to "whether rates are high enough."

Fed Officials' Statements: From Rate Cut Bias to Neutral Stance

Philadelphia Fed President Anna Paulson stated bluntly last week that inflation is too high, pointing out that even before the Middle East conflict and soaring oil and gas prices, inflation was already high.

She outlined a clear three-tiered policy framework: maintaining interest rates unchanged (for an extended period if necessary); further tightening if necessary; and only considering rate cuts when inflation shows a clear and sustainable decline. Paulson emphasized that the current moderately restrictive monetary policy is helping to mitigate the price increases caused by tariffs and the Middle East conflict. She believes the market has begun to consider the scenario of unchanged or even raised interest rates, and this pricing change is "benign and healthy."

Paulson's statement vividly reflects the Fed's shift in stance from "the next step is a rate cut" to "whether interest rates are high enough." This shift is also corroborated by former Chairman Powell—who stated at his last press conference at the end of April that the committee's focus had shifted from a bias towards rate cuts to a "more neutral position."

Conclusion:

The bond market is forcing the Fed to adopt a "higher and longer" interest rate stance, becoming a new consensus.

In summary, the bond market is sending a clear signal to the Fed through soaring yields: current interest rates are insufficient to curb inflation. Economic data shows that inflation is rising while consumption remains resilient, and market expectations have shifted from rate cuts to holding rates steady or even slightly tightening. Philadelphia Fed President Paulson's remarks confirm a shift in thinking within central banks—from "when to cut rates" to "whether rates are high enough." Under the dual pressure of the bond market's "threat" and economic data, the Fed may have to maintain a "higher and longer" interest rate stance during the Warsh era.

Until inflationary pressures completely ease, long-term interest rates are more likely to rise than fall, and various assets will continue to seek reasonable pricing ranges in a high-interest-rate environment.

The 3 percentage point USD/JPY interest rate differential is suppressing the yen; the psychological level of 160: will it break through or not?

The USD/JPY pair is currently in a consolidation phase due to geopolitical uncertainty, and the USD/JPY interest rate differential remains the core determinant of its medium-term direction.

The yen's recent poor performance has failed to maintain demand against the dollar. In fact, the USD/JPY has risen nearly 1% in the past 10 trading days, reflecting a short-term weakening of the yen. However, in addition to buying pressure on the currency pair, the recent weakness of the dollar is also beginning to indicate a neutral phase.

This is mainly due to the unclear direction of the dollar caused by conflicting rhetoric surrounding the Middle East, while the yen has also failed to show clear appeal. If the geopolitical situation doesn't become clearer, this period of uncertainty could continue to influence the yen's exchange rate.

Middle East Situation: Optimistic Expectations Coexist with Military Strikes, Dollar Remains Neutral

Over the weekend, comments about the US and Iran intensifying their efforts to reach a peace agreement in the near future sparked some optimism. Such an agreement, if reached, could allow the Strait of Hormuz to reopen and reduce some global geopolitical uncertainty, which could initially weigh on the dollar.

However, the peace agreement has not yet been signed, and the US launched new attacks in southern Iran, which could escalate tensions again and reduce hopes for a quick agreement. This neutral state is reflected in the dollar index—currently hovering around 99, but its curve has clearly flattened, indicating a lack of clear direction for the dollar.

Despite the dollar's neutral stance, the market remains cautious and has not seen a rapid increase in demand for the yen. This may be because participants are still waiting for greater clarity on the Middle East situation before taking more definitive positions. Therefore, unless there is significant progress, the neutral state of the dollar index is likely to continue to be reflected in the USD/JPY exchange rate, indicating that the yen has not yet regained sustained appeal.

Interest Rate Differentials Remain a Dominant Long-Term Factor: US-Japan Interest Rate Spread Remains High

Interest rate dynamics between the two countries have been one of the main factors influencing the rise of the US dollar against the Japanese yen in recent months. The US benchmark interest rate remains at 3.75%, while Japan's is at 0.75%, with the interest rate differential still significantly favoring the dollar. The Federal Reserve faces the dual challenges of weakening job growth momentum and potential inflationary pressures from the Middle East conflict, and is expected to maintain interest rates unchanged in the short term, reinforcing a controlled neutral outlook.

The short-term outlook for Japan is similar. Although the Bank of Japan is concerned about inflation nearing its 2% target and low real interest rates, the possibility of further rate hikes has not yet become clear. Market uncertainty regarding whether the Bank of Japan will maintain stable interest rates or begin a small rate hike in June has failed to provide a clear signal that the interest rate differential will soon narrow, thus limiting the possibility of sustained demand for the yen.

Therefore, interest rate differentials remain a key factor. Higher US interest rates make its bond market more attractive relative to Japan, thus providing stronger support for dollar demand. Unless the Bank of Japan decides to raise interest rates to narrow the interest rate differential with the US, the yen may lack a solid foundation for a sustained recovery.

Conclusion:

Interest Rate Differentials Dominate Medium-Term Direction; Yen Recovery Requires Policy Shift

In summary, the USD/JPY pair is currently in a consolidation phase due to geopolitical uncertainty, with the USD/JPY interest rate differential remaining the core determinant of its medium-term direction. In the short term, developments in the Middle East and US PCE data may break the deadlock; in the medium term, unless the Bank of Japan clarifies its interest rate hike path to narrow the interest rate differential, the yen will struggle to establish a solid foundation for sustained recovery.

Elevated Geopolitical Risks vs. Rebounding US Treasury Yields: Gold in a Dilemma

Gold remains trapped in a highly news-sensitive trading environment. The market is attempting to balance conflicting forces: geopolitical instability, oil price volatility, uncertain Fed expectations, and the possibility of a diplomatic breakthrough between the US and Iran.

Spot gold fluctuated slightly lower, briefly dipping below $4,500/oz, and is currently trading around that level, as investors digest yet another reversal in the US-Iran situation.

While geopolitical uncertainty typically fuels stronger safe-haven buying of gold, this situation is complicated by the rebound in energy prices and bond yields.

The latest US strikes on Iranian targets have fueled market doubts about how close Washington and Tehran are to reaching an agreement. Just days earlier, Trump stated that negotiations were "going well," which on Monday supported risk appetite and briefly eased concerns about escalating regional tensions; this optimism now appears more fragile.

Oil prices and US Treasury yields remain key drivers.

Despite renewed tensions, gold failed to attract significant safe-haven inflows. Instead, a stronger dollar and modest yield increases kept gold prices hovering near familiar levels, indicating renewed downward pressure.

Currently, gold's direction seems increasingly dependent on the performance of oil prices and US Treasury yields, rather than purely geopolitical factors. Today's rebound in oil prices following the US strikes has reignited market concerns that a peace agreement is not yet imminent and that inflationary pressures may persist for a longer period.

If the energy market continues to climb, bond yields are likely to remain high as traders advance their expectations of Federal Reserve monetary tightening.

This dynamic creates a challenging environment for gold: higher yields increase the opportunity cost of holding non-interest-bearing assets like gold, limiting the potential for a sustained rally during periods of geopolitical uncertainty.

Markets are highly sensitive to geopolitical news; gold prices are caught in a tug-of-war.

Meanwhile, markets remain highly sensitive to any signs of progress in US-Iran diplomacy. A confirmed agreement could reduce immediate tensions in the region, putting pressure on oil prices and easing inflation concerns.

In this scenario, lower yields could ultimately provide more meaningful support for gold prices. However, neither scenario currently dominates, leaving gold prices stuck in an unsettling middle ground, with a slight downward bias in the short term.

Institutional Views

Citigroup believes that once a US-Iran agreement is reached and navigation resumes in the Strait of Hormuz, falling oil prices will weaken inflation expectations, pushing up real interest rates and thus suppressing gold prices. The bank sets a three-month gold price target of $4,300 per ounce.

Goldman Sachs maintains its bullish view and has raised its global central bank gold purchase forecast, reiterating its year-end gold price target of $5,400 per ounce. The basis for this is the continued gold purchases by central banks worldwide and market expectations of two more US interest rate cuts this year.

Morgan Stanley was the first to lower its forecast at the end of April, reducing its gold price target for the second half of 2026 to $5,200/ounce. Their core logic is that geopolitical conflicts are causing real interest rates to rise, and the Fed's rate cuts are being delayed, thus normalizing the classic negative correlation between gold and real interest rates. They believe gold is shifting from a "safe-haven trade" to an "interest rate trade."

Conclusion:

In summary, gold is currently trapped in a highly news-sensitive trading environment. The market is trying to balance conflicting forces: geopolitical instability, oil price volatility, uncertain Fed expectations, and the possibility of a diplomatic breakthrough between the US and Iran. Unless a clear agreement emerges in the coming days, volatile trading is likely to continue.

Overview of Important Overseas Economic Events and Matters This Week:

Monday (June 1st): Eurozone April M3 Money Supply YoY (%); Eurozone May SPGI Manufacturing PMI Final; Eurozone April Unemployment Rate (%); US May SPGI Manufacturing PMI Final; US May ISM Manufacturing PMI

Tuesday (June 2nd): Australia ANZ Consumer Confidence Index for the week ending May 31st; Australia Q1 Current Account (AUD billion); Eurozone May Harmonized CPI YoY - Unadjusted Preliminary (%); US April JOLTs Job Openings (thousands); Bank of England Governor Bailey attends a hearing in the House of Lords.

Wednesday (June 3rd): Australia May AIG Manufacturing Performance Index; Australia Q1 Seasonally Adjusted GDP QoQ (%); UK May SPGI Services PMI Final; US May ADP Employment Change (thousands); US April Durable Goods Orders MoM (Revised) (%) US April Factory Orders (MoM) (%); US May ISM Non-Manufacturing PMI; Bank of Japan Governor Kazuo Ueda speaks

Thursday (June 4): Australia April Imports/Exports (MoM) (%); Eurozone April Retail Sales (MoM) (%); US Initial Jobless Claims for the Week Ending May 30 (in thousands); Global May Supply Chain Stress Index; Federal Reserve Beige Book; ECB President Christine Lagarde speaks; Bank of England Governor Bailey speaks at the Investment Association conference

Friday (June 5): Eurozone Q1 Final GDP (QoQ) (%); US May Non-Farm Payrolls (QoQ) (in thousands); US May Average Hourly Earnings (YoY) (%); US May Unemployment Rate (%); Canada Q1 Annualized GDP (QoQ) (%)

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