Economic Slowdown Concerns Grow Even as Geopolitical Tensions Ease – Saxo Bank

Key Points: 

• Macro events: Germany May IFO survey, US Fed’s Waller to speak

• Commodities: Small weekly loss led by energy and livestock

• Equities: US equities rose, Europe paused near highs, and Asia’s chip-heavy markets rallied as AI optimism broadened.

• Currencies: Major US dollar pairs sluggish, with market pricing little 

• Fixed Income: US long treasury yields ease lower, Short-dated JGB’s rally on soft inflation numbers from Japan

Macro headlines

• Hopes for a diplomatic resolution to the Iran conflict supported markets, with Tehran saying the latest proposal from Washington had helped narrow differences between the two sides. However, major hurdles remain, with the US demanding that Iran hand over its enriched uranium stockpile and commit to ending uranium enrichment, terms Iranian leaders have publicly resisted
• Japan’s Apr. National CPI came in softer than expected, at 1.4% YoY on the headline versus 1.6% expected and 1.5% previously, while the April core, ex-Fresh-Food-and-energy measure notched a 1.9% YoY reading, matching a four-year low and below the 2.2% expected and 2.4% reading from MArzch
• The UK private sector slipped into contraction territory in May for the first time in over a year, according to the flash composite May PMI, which fell from 52.6 in April to 48.5 in May, a major negative surprise versus the 51.6 consensus. While the Manufacturing PMI actually came in better than expected at 53.7, the Services PMI plummeted to 47.9 versus 52.7 in April.
• German private sector activity contracted for a second consecutive month, with the Flash Germany Composite PMI Output Index rising to 48.6 in May from the previous 48.4 and versus 48.5 expected.
• The EU plans to temporarily lift sanctions on a major Chinese chip supplier after automakers warned of looming supply-chain disruption; the Pentagon may scrap an $80 million conditional loan to rare-earths refiner ReElement.
• Overall, the global economy is showing signs of slowing momentum and rising inflation pressures as it enters the third month of a war-driven energy crunch. PMIs from Australia to Europe pointed to growing strains across both manufacturing and services sectors in May. Factory activity, as measured by S&P Global, either slowed or contracted across most economies surveyed, with the UK being a notable exception and the US where manufacturing expanded in May at the fastest pace in four years as firms front-loaded orders amid Iran-war-related price concerns. Services PMIs were more generally weak, with France registering a plunge to 42.9, its weakest reading since a pandemic-impacted late 2020 reading.

Commodities

• The Bloomberg Commodity TR Index is heading for a modest weekly loss of around 1%, trimming the year-to-date gain to 29%. Losses across energy, led by fuel products, and livestock were only partly offset by gains in industrial metals and grains. Precious metals trade slightly softer following a strong rebound, while softs are mixed. The week’s top performers are aluminum, coffee, and soybeans, while gasoline, gas oil, and cocoa lead declines.
• Brent crude fell towards USD 102 low on Thursday from above USD 112 on Monday on renewed hopes for a US-Iran deal, before rebounding to around USD 105 today after comments from Iran’s Supreme Leader on maintaining Tehran’s uranium stockpile, alongside a dispute over tolls in the Strait of Hormuz, clouded the prospects for a breakthrough. Crude remains the key macro driver, with commodity, bond, FX, and equity markets all looking to oil for direction. That grip may persist until the Strait reopens and inflation pressures begin to ease.
• Gold holds above USD 4,500, trading within a relatively narrow range after finding renewed support earlier in the week as crude oil prices eased amid ongoing US-Iran talks. Lower oil prices helped reduce pressure on central banks to hike rates while stabilizing the long end of the yield curve, where an earlier surge in yields had pushed gold to a three-week low. Technically, the 200-day moving average at USD 4,372 and the 50-day at USD 4,667 continue to define the outer boundaries, with the metal likely retaining a slight negative bias until the Middle East crisis is resolved.
• Copper, the metal at the center of the global energy transition, trades near a one-week high, supported by apparent progress in US-Iran talks and an improvement in broader risk sentiment. The metal recently reached a record high before retreating amid macro-driven headwinds, but longer-term support remains underpinned by expectations that mine supply will struggle to keep pace with demand from AI, clean energy, electrification, cooling demand, and strategic stockpiling. Adding to supply concerns, Codelco, the world’s largest copper producer, saw its 2025 output fall to the lowest level since 1998.

Equities

• USA: US equities closed higher, with the Dow Jones up 0.6% to a record 50,285.66, while the S&P 500 gained 0.2% and the Nasdaq Composite added 0.1%. The session was helped by firmer risk appetite, lower oil worries and excitement around quantum computing after the US government announced $2 billion in sector grants. IBM surged 12.4% as it received the largest funding allocation, while Nvidia fell 1.8% despite strong results, as expectations are now doing Olympic-level high jump. Walmart traded weaker after its earnings outlook disappointed, while Ross Stores rose 5% after hours on better sales and earnings.
• Europe: European equities finished broadly flat, with the Stoxx 600 up 0.04%, the DAX down 0.5% to 24,606.77, and the FTSE 100 up 0.1% to 10,443.47. Investors weighed Middle East diplomacy and oil-price moves, leaving the market without a clear direction after recent gains. Airbus fell 4.3% and was a drag on Germany, while QinetiQ and Investec rose after earnings came in ahead of expectations. Naturgy reached its highest level since 2022 after analyst upgrades, while Turkish equities fell 6.0% and triggered a market-wide circuit breaker. Markets now watch oil, rates and earnings quality.
• Asia: Asian equities finished the Friday session firmly risk-on, tracking Wall Street’s gains and helped by optimism around possible US-Iran talks. Japan led the region, with the Nikkei up over 2.5%, supported by tech strength and a sharp rally in SoftBank, while the broader MSCI Asia-Pacific gauge rose about 0.8%. Hong Kong’s Hang Seng gained roughly 1.2%, with Lenovo hitting a multi-decade high after strong AI-related earnings, while Korea’s Kospi also advanced.

Currencies

• The US dollar traded largely sideways after a push higher Thursday faltered and US treasury yields and crude prices dropped back. EURUSD has been sticky near the 1.1600 level, posting a marginal new local low Thursday at 1.1576 before rebounding back above 1.1610. Anticipated volatility in the EURUSD exchange remains low as measured by the implied volatility in options markets, even with the uncertainty surrounding the Iran War and the imminent arrival of the new Fed Chair Warsh. The 1-month EURUSD implied volatility is below 5.9%, down from 8% and higher in March.
• USDJPY remains sticky near 159.00 as the market absorbs the soft April inflation data from Japan that has taken some wind out of anticipation for the Bank of Japan’s further policy tightening. Implied volatility in the options market suggest the market sees little potential for large moves, presumably as the pressure remains to the upside as long as the Bank of Japan proves slow to tighten policy, while the Ministry of Finance has threatened intervention if the JPY weakens. USDJPY 1-month implied volatility has slipped below 7%, nearly matching the lowest levels since early 2022.
• The Swedish krona found support recently right at the 11.00 level in EURSEK, with that pair pushing lower to below 10.85 Thursday, likely in part on hopes that crude oil prices will continue falling and brighten the outlook for European growth. 

Fixed Income

• US long-dated Treasuries rallied and the yield curve flattened sharply as crude oil prices dropped again Thursday on hopes for a peace deal with Iran. The benchmark US 10-year treasury yield fell another couple of basis points, trading near 4.56%, with the 4.50% area lower still seen as a psychologically key level. At the short end of the treasury yield curve, yields actually rose slightly ahead of a speech from FOMC voter and Fed Governor Waller later Friday on the US economic outlook as the market mulls whether the Fed may hike rates later this year. The benchmark 2-year treasury yield trades in the middle of the range of the last four days near 4.08%.
• Japan’s short-dated government bond yields dropped on the soft April inflation data (see above), suddenly casting a shadow over BoJ rate hike intentions. The benchmark 2-year JGB yield dropped back two basis points to 1.43%, while longer dated yields were steady, the benchmark 10-year JGB trading nearly unchanged on the day Friday near 2.77%.