Stocks rebound and gold dips….for now

Summary

• Iran proposes a ceasefire, sending stocks higher while gold dips
• The attacks continue, with uncertainty high
• But short-term volatility is unlikely to affect long-term secular trends

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The Israel-Iran conflict entered its fifth day on Tuesday, with an Israel Defence Force spokesman claiming the IDF had achieved air dominance over Tehran. Uncontested air sorties continue to attack military targets as well as the state broadcaster.

So far, attacks by the IDF have largely avoided oil infrastructure. Still, Israeli drone attacks set off a large fire at the Shahran oil depot in northern Tehran, and another at the offshore South Pars gasfield, the source of two-thirds of Iranian gas production. Meanwhile, Iran struck an oil refinery in Haifa. A spillover into strikes on oil facilities would mark a significant escalation, threatening to draw in other states reliant on oil supplies through the Strait of Hormuz.

Iran’s biggest uranium enrichment plant at Natanz has been badly damaged, but the enrichment site at Fordow, built under a mountain, is largely untouched. The IDF’s capability to eliminate the second site is questionable.

The Iranian proposal for a ceasefire, in return for flexibility in nuclear negotiations, allayed market fears. However, President Trump spooked markets when he cut short his visit to the G7 and called for the US national security council to assemble on his return.

One commentator observed: “You don’t convene the NSC to announce a peace proposal.”

Stock market futures dropped in after-hours trading, while gold found support.

Before the close on Monday, the S&P 500 recovered above 6000, but short daily candles warn of hesitancy.

The Dow Jones Industrial Average displays similar uncertainty. Reversal below 41.5K would warn of another correction.

Financial Markets

The Fed continued its QT program in May, shrinking assets on its balance sheet by $36 billion.

However, on the liability side, the Treasury General Account declined by $129 billion, significantly boosting overall market liquidity in May.

Commercial bank reserves climbed to $3.407 trillion on June 11, reflecting the surge in liquidity.

Treasury Markets

10-year Treasury yields are headed for another test of 4.5% as the probability of another Fed rate cut fades. Markets are not expecting a rate cut at Wednesday’s FOMC announcement.

The fiscal deficit for the year to May climbed to $1.365 trillion, up from $1.202 trillion in the corresponding eight months of the previous year. The projected deficit for the financial year is $1.88 trillion.

Dollar & Gold

The US Dollar Index continues to test support at 98. The recent Trend Index peak below zero warns of strong selling pressure, and follow-through below yesterday’s low would confirm our target of 90.

Gold retreated below support at $3,400 per ounce as traders took profits. A breach of $3,300 would warn of another test of $3,150, but respect is as likely to signal another test of $3,500.

Silver held firm above $36 per ounce, suggesting a continuation of its recent uptrend.

Conclusion

The Israel-Iran conflict is unlikely to escalate unless Iran attempts to close the Strait of Hormuz, threatening global oil supplies. We expect short-term volatility but little effect on the long-term secular trends in global financial markets.

The status of US Treasuries as the global reserve asset is fading. Rising fiscal deficits and debt levels have triggered a secular bear market in bonds and the dollar. Central banks are increasingly replacing fiat currency reserves with gold as the primary global reserve asset. We expect the trend to continue until gold reaches 60% to 70% of total reserves, the norm during the Bretton Woods era of gold convertibility during the 1950s and 60s.

The dollar is in a strong downtrend due to capital outflows from US financial markets. However, long-term Treasury yields remain range-bound. Speculation on further Fed rate cuts is offsetting pressure from capital outflows. Financial markets are pricing in two rate cuts by the end of the year, but the Fed is likely to stand firm for as long as employment numbers remain strong.

Stocks face headwinds from three sources: lower revenue growth from a slowing economy, narrower margins due to import tariffs, and higher interest rates. Widening fiscal deficits, precarious public debt levels, and higher inflation all increase the interest premium demanded for long-term investments.

The Fed can always suppress long-term interest rates to support the US Treasury. However, this would raise inflation, weaken the dollar, and accelerate the growing demand for gold.

Acknowledgments

• Federal Reserve of St Louis: FRED Data
• Bureau of the Fiscal Service: May 2025 Treasury Statement
• University of Michigan: Survey of Consumers
• Al Jazeera: Huge oil depot fire rages in Tehran after Israeli strike