Rate-Cut Hopes Collide With Middle-East Risk
Wall Street closed a jittery week with its third straight equity loss as investors struggled to reconcile an increasingly dovish signal from parts of the Federal Reserve with fresh geopolitical flash-points in the Middle East. The tension produced a classic “risk-off, policy-on” tug-of-war that left major benchmarks little-changed for the week but masked pronounced sector rotation and a sharp move into shorter-duration Treasuries (AP, 2025; Reuters, 2025).
Monetary-Policy Divergence Inside the Fed
Governor Christopher Waller, historically viewed as a policy hawk, told CNBC that the disinflation trend now appears “broad and durable,” warranting consideration of a 25 bp cut as soon as the 30-31 July FOMC. By contrast, Chair Jerome Powell has stressed the need for “greater confidence” that consumer-price gains will sustain a glide-path toward 2 %. The rhetorical gap matters: markets usually key off Powell, yet Waller’s remarks pushed Fed-funds futures to imply 65 % odds of a July move, from 48 % a week ago.
Equity Tape Action
The S&P 500 slipped 0.2% on Friday to 5,967.84, its poorest three-day streak since early May. The technology-heavy Nasdaq under-performed, down 0.5%, dragged by semiconductors after a Wall Street Journal scoop confirmed by Reuters that Washington is poised to revoke special licences allowing Samsung, SK Hynix and TSMC to ship U.S.-origin technology into their Chinese fabs. Shares of Nvidia, Lam Research and KLA all fell between 1% and 2%, reflecting concerns that tighter export controls could ripple through already-fragile chip supply chains.
In contrast, defensive and yield-sensitive segments utilities (+0.6%) and real-estate investment trusts (+0.4%) out-performed as traders rotated toward rate-cut beneficiaries. Retail favourite Kroger soared nearly 10% after beating earnings estimates, illustrating how idiosyncratic corporate news can still trump macro headlines for select names.
Geopolitical Overhang Intensifies
Risk appetite was further undermined by escalating Israel-Iran hostilities. Israeli strikes reportedly targeted Iranian missile depots near Isfahan, while Tehran vowed retaliation but hinted it might cap uranium enrichment at 60% if talks resume. President Trump postponed any U.S. military response for “up to two weeks,” a move that bought diplomatic time but prolonged uncertainty. Brent crude fell 2.1% to $77.23 bbl on de-escalation hopes, yet remains 4% higher week-on-week, underscoring lingering supply-risk premia.
Fixed-Income & Derivative Dynamics
Friday was a “triple witching” session simultaneous expiry of index options, single-stock options and equity futures usually a recipe for volume spikes and price swings. The S&P 500’s intraday range was 38 points, modest relative to historic witching days but still above the 20-day average. In rates, front-end Treasuries caught a bid: the 2-year yield eased four basis points to 3.90%, reflecting both haven flows and a recalibration of Fed expectations, while the 10-year held at 4.37%, flattening the curve to 47bp. Lower real yields lent support to gold, though the metal still logged a 2.3% weekly decline.
Comparative & Sectoral Perspectives
From a cross-asset lens, U.S. equities remain more sensitive to rate rhetoric than to Middle-East news shocks a pattern mirrored in option-implied volatility, where the VIX closed just below 16. European bourses, by contrast, shed nearly 1 % amid higher energy dependence and direct export exposure to the conflict region. Energy names globally have decoupled from oil prices, suggesting investors believe demand destruction from slower growth could offset supply risk. Semiconductors are now the epicentre of geopolitical as well as cyclical risk, reinforcing the notion that tech leadership is contingent on both policy and national-security variables (Reuters, 2025).
Forward-Looking Scenarios
Baseline: The Fed cuts 25bp in July, oil remains range-bound, and the S&P 500 resumes a modest up-trend toward 6,100 by year-end, propelled by lower discount rates and solid earnings growth (~9% y/y).
Downside (20% probability): Israel-Iran conflict broadens, Brent spikes > $95, headline U.S. CPI re-accelerates, forcing the Fed to delay easing; equities correct 8-10%.
Upside (15%): Rapid de-escalation in the Gulf plus soft-landing data allow 50 bp of Fed cuts by September; S&P 500 migrates toward 6,300 with cyclicals and small-caps catching up.
Conclusion
Friday’s session encapsulated the market’s current dilemma: rich valuations supported by prospective monetary relief are colliding with exogenous shocks that could quickly rewrite the macro script. Until clarity emerges ideally via cooler core PCE prints and a durable ceasefire in the Middle East traders are likely to keep trimming risk at new highs and leaning on front-end Treasuries as a ballast. In short, volatility is the price of admission to a late-cycle bull, and for now investors are still willing to pay it.
Source
Associated Press. (2025) US stocks drift to a mixed finish as Wall Street closes another week of modest losses, 21 June.
Reuters. (2025a) Fed’s Waller: Rate cuts should be considered by July, 20 June.
Reuters. (2025b) US prepares action targeting allies’ chip plants in China, 20 June.
Reuters. (2025c) Wall Street edges up with Trump’s Middle East decision in focus, 20 June.