Renewed Iran Uncertainty and Rising Fed Hike Speculations

In focus today

In the euro area, the June Sentix investor confidence index is released today. Markets look for an improvement to -14.6 (May: -16.4), extending last month’s positive momentum, although sentiment remains pessimistic amid rising inflation and a weak growth outlook.

In Germany, April industrial orders are due. After the 5.0% m/m surge in March, believed to reflect firms bringing orders forward on concerns over higher costs and supply disruptions, markets now expect a 2.0% m/m decline.

Overnight, China releases trade data, with focus on whether export growth can be sustained amid global headwinds from the war in Iran. Exports have grown at a solid pace of around 15% y/y so far this year, but weaker PMI export orders in April and May suggest momentum is fading.

This week, the main market mover is Thursday’s ECB meeting, where we and markets expect a 25bp hike. Ahead of that, Wednesday brings the Bank of Canada rate decision alongside Danish and Norwegian inflation figures, followed on Thursday by Norges Bank’s Regional Network Survey, the Central Bank of Turkey’s rate decision and final Swedish inflation. The week ends with final euro area inflation on Friday.

Economic and market news

What happened overnight

On the Iran war, Israel carried out overnight air strikes inside Iran after Tehran fired ballistic missiles at northern Israel on Sunday, the first such exchange since the April ceasefire. Iran’s attack followed Israeli strikes on Beirut earlier in the day. The escalation hit oil markets this morning, with Brent crude up about 3% to around USD 96/bbl, as hopes fade for a broader regional deal to reopen the Strait of Hormuz. US President Donald Trump said he had told Israel not to respond militarily and insisted the flare-up would not derail a potential US-Iran agreement.

In Japan, final Q1 GDP was revised slightly lower to 0.45% q/q (prev.: 0.51%, cons.: 0.3%) on weaker capital expenditure, while private consumption, which accounts for approximately 50% of GDP, held steady. The Bank of Japan is expected to stay on its current policy path.
What happened over the weekend

In the US, Friday’s May jobs report came in stronger than expected. Nonfarm payrolls rose 172k (Danske: +110k, cons.: +85k) and the unemployment rate printed at 4.3% (Danske: 4.2%, cons.: 4.3%). Previous nonfarm payroll figures were revised up by a sizeable 93k for March-April, and wage sum growth, which is closely correlated with private consumption, accelerated to 4.1% y/y from 3.8%. The labour market strength remains broad-based across sectors, in line with the signal from the ADP report earlier last week. Overall, the report revealed no major weak spots, which led markets to increase the probability of Fed hikes. In the immediate market reaction, EUR/USD moved lower and UST yields rose, with markets now pricing around 40bp of cumulative Fed hikes towards 2027.

Also in the US, the May Challenger report on Thursday showed announced layoffs rising to 97k, the third consecutive monthly increase. Technology led with 38k cuts and AI remained the main stated driver, accounting for about 40% of all announced layoffs.

In Sweden, May flash inflation surprised to the upside. Core inflation printed at 0.5% y/y (Danske: 0.2%, cons.: 0.3%), which pushed up CPIF to 1.5% y/y (Danske: 1.3%, cons.: 1.3%). The surprise stemmed mainly from services, where the limited flash details indicate unusually strong price increases in recreation, up 3.9% m/m in May. From 1 May, the fuel tax was reduced by SEK 1 per litre, which is helping to dampen the rise in energy prices. While the stronger core reading is unlikely to change our expectation that the Riksbank will stay on hold in June, it reinforces the case for tighter policy further ahead. We continue to look for two 25bp rate hikes in September and December.

In the euro area, the third estimate revealed that GDP unexpectedly contracted by 0.2% q/q in Q1 2026, revised down from the previous 0.1% q/q growth estimate and marking the first decline in over three years. The revision mainly reflects a sharp 12.1% q/q drop in Irish GDP, driven by lower exports from multinational pharmaceutical groups. Despite the weaker activity, euro area employment rose 0.1% q/q in Q1 2026.

In Norway, manufacturing production decreased -0.9% m/m in April, taking the underlying trend to 0.4% 3m/3m. Hence, the moderate upswing in manufacturing activity continues, supported by oil-related industries, whereas activity in non-oil industries now is moving sideways.

Equities: Equities sold off sharply on Friday, particularly during the US session, led by tech. Still, it is worth noting that more industries actually finished higher than lower on the day, despite the weakness in the headline US indices. The sell-off was extremely concentrated: US semiconductors were down 8.2%, and semis account for roughly 15% of the S&P 500.

The VIX rose to 21, headline indices were lower, led by Nasdaq, but small caps outperformed. That points to tech-led large-cap underperformance rather than a broad-based risk-off move. Importantly, this had nothing to do with Iran. The Iran headlines came later, and oil was down on Friday. Nor was this caused by stronger jobs data. That may well have been the trigger, but it is a poor explanation for the move. The real reason is that global tech, the largest sector in the world, had risen around 50% in just about two months. After that kind of move, setbacks like Friday’s are entirely normal.

Please remember, in the strongest bear markets, we also get days with very powerful equity rallies, and vice versa: in strong bull markets, we also get days with sharp selloffs. That is exactly the kind of environment we are in now.

Even if the Fed were to hike, or if oil were to rise 3% (like this morning), that does not change the outlook for the AI build-out or the extreme earnings growth currently being delivered. Hence, this should not be used as the excuse for why tech sold off on Friday.

Asia is massively lower this morning, especially in markets where tech has driven strong year-to-date performance. That should be seen in the same light. European futures are lower, catching up to Friday’s late US weakness, while US futures, especially in the tech space, are higher this morning.

FI and FX

Oil jumped overnight, with Brent at USD 96.5/bbl as the situation in the Middle East escalated with new air strikes between Israel and Iran. EUR/USD plunged towards 1.15 on Friday following the strong US jobs report and yields rose. US yields continue to move higher in overnight trading with 2Y UST now at 4.19%, around 15bp higher compared to before the jobs report was released. The 10Y UST is trading at 4.57%. The strong jobs report weakened risk sentiment on Friday, and this theme continued in Asia overnight. The data calendar is thin for the day, but later this week focus will be on the US CPI report (Wed) and the ECB (Thu). A hike to 2.25% from the ECB is widely expected and priced in, but we do not expect Lagarde to pre-commit to further hikes.