Key Highlights

• President Trump raises the question of regime change in Iran following “Operation Midnight Hammer” strikes against nuclear sites over the weekend.

• Iran weighs retaliation; markets are focused on Strait of Hormuz, with crude oil tanker traffic down 31% m/m.

• Japanese Prime Minister Ishiba cancels his attendance at the upcoming NATO summit, as his ruling party suffers a historic defeat in the Tokyo Assembly elections.

Chart of the Day

EXHIBIT #1: FLOWS INTO USD-DENOMINATED CASH AND SHORT-TERM INSTRUMENTS

^{Source: BNY}

As anticipated, the dollar rallied in early trading after the weekend’s geopolitical developments. We expect a period of sharp rises in liquidity preference for havens, as markets brace for further volatility. We have already seen in recent weeks that any geopolitically driven risk tends to support the dollar. This manifests in various ways. In this report, we focus only on highly liquid dollar instruments, meaning dollar forwards and swaps, dollar spot, dollar cash and short-term instruments, and T-bills are all relevant. In the lead-up to the weekend – and even considering last week’s Federal Reserve decision and other market drivers – current dollar preference appeared relatively muted. For example, CAST flows were quite solid but turned around sharply after the Fed decision. Purely from a policy perspective, we believe this reflects a market view that the Fed can no longer distance itself from easing. However, in the near term, we expect geopolitics to remain at the forefront of market sentiment. This suggests that where positioning is light, the dollar has significant upside potential. We have already seen this reflected in overnight FX moves, and this trend is likely to continue until markets find a new geopolitical equilibrium. 

What's Changed?

Risk sentiment was mixed, as investors shrugged off the weekend’s events. APAC opened with S&P 500 futures off 0.5%; now up 0.1%. The ability for nothing to ever matter to markets will be tested in the weeks to come; for today, however, the lack of an immediate Iranian response to the U.S. attacks on its three nuclear facilities is a source of relief. The barometer of crude oil prices moved from +5% at the Asia open to -0.5% ahead of the U.S. open. The better flash PMI reports – particularly in Europe – highlight another shrug for the markets, as looming trade tariff deadlines aren’t riling outlooks in the same way as they did in April. Investors are holding a bit more cash and waiting, with a steady trickle of money flowing into riskier assets in search of return. The rise in yields maybe the one place where some limits are felt: as equities remain close to record highs, rates have further to go to reflect inflation and supply fears. FX markets are caught between a focus on recovering growth and inflation upside, with asset flows indecisive. USD gained against most emerging markets and is much stronger against the JPY, where politics are dominating worries. For USD to be able to rally further, more evidence will be required that the Fed will find a soft landing again, even as financial conditions tighten. Some clarity is also needed over escalation of the Iran conflict, with the search for 400kg of enriched uranium key. Some of this will be linked to oil and other commodity prices, and some to the U.S. Congressional “big, beautiful tax bill”; meanwhile the rest of the world believes that flat growth is good enough – muddling through with the status quo. The day ahead will bring some color from Fedspeakers and the flash PMI reports, while the week ahead sees FOMC Chair Jerome Powell’s testimony to Congress, U.S. durable goods and PCE releases, and more bond supply, with an estimated $25bn of IG paper and U.S. Treasury 2y ($69bn), 5y ($70bn) and 7y ($44bn) sales. All of this will matter to month-end, quarter-end and half-year-end shrugging. 

What You Need to Know

Eurozone business activity grew marginally in June, with the HCOB Flash Composite PMI holding steady at 50.2 for a second month. Services stabilized, with the services PMI rising to 50.0 (May: 49.7), while manufacturing continued to expand modestly, though the output index eased to 51.0 (May: 51.5). Manufacturing PMI remained at 49.4. New orders fell at the slowest rate in over a year, and manufacturing orders were unchanged for the first time in three years. Employment rose slightly, driven by services, though jobs declined in Germany and France. Input cost inflation eased to a seven-month low, but service sector price pressures lifted overall output prices. Business confidence improved to its highest level since January, led by services. Euro Stoxx 50 +0.155% to 5241.7, EURUSD -0.443% to 1.1472, BBG AGG Euro Government High Grade EUR -1.6bp to 2.781%.

Germany’s private sector returned to growth in June, with the HCOB Flash Composite PMI rising to 50.4 from 48.5 in May, a three-month high. The rebound was driven by a strong performance in manufacturing, where output rose to 52.6, its highest in over three years, and the PMI climbed to 49.0. Services activity remained in contraction but improved to 49.4. New orders increased for the first time since May 2024, led by a surge in factory demand, including from abroad. Employment declined overall due to an acceleration in manufacturing job cuts. Input cost inflation softened, but output prices rose slightly due to service sector increases. Business optimism dipped marginally, though manufacturing sentiment reached its strongest level since February 2022. DAX -0.042% to 23340.7, EURUSD -0.443% to 1.1472, 10y Bund +2.7bp to 2.544%.

U.K. private sector output growth picked up in June, with the Flash UK Composite PMI rising to a three-month high of 50.7 in May, from 50.3. Services led the expansion, with the Business Activity Index at 51.3, while manufacturing remained in contraction despite improving to 47.7. New business volumes returned to growth for the first time since November 2024, but export orders declined again, particularly in manufacturing. Input prices across the private sector rose at their slowest rate in three months, and output charges increased more slowly than at any point since January 2021. Employment contracted for the ninth straight month amid weak demand and rising cost pressures. FTSE 100 +0.024% to 8776.77, GBPUSD -0.342% to 1.3405, 10y gilt +1.8bp to 4.555%.

Japan’s ruling Liberal Democratic Party (LDP) suffered a record-low result in the June 22 Tokyo assembly election, securing just 22 seats. This was down from 30 in the previous assembly and below its prior 2017 low of 23. Tomin First no Kai, led by Tokyo Governor Yuriko Koike, won the most seats at 32, buoyed by support for its welfare and childcare policies. The Constitutional Democratic Party and Komeito secured 17 and 19 seats, respectively, while the Democratic Party for the People claimed nine – its first Tokyo assembly wins. Newcomer Sanseito gained three seats. Voter turnout rose to 47.59%, with early voting reaching 1.73 million, roughly 300,000 more than in 2021. Prime Minister Ishiba said the LDP will “analyze what messaging did not reach voters” and acknowledged the result was a “tough verdict.” Nikkei -0.128% to 38354.09, USDJPY +0.897% to 147.4, 10y JGB +1.7bp to 1.415%.

Japan June flash PMI manufacturing moved back into expansion zone at 50.4 after 11 months of contraction. PMI services rose to 51.5 from 51.0. The upturn in manufacturing was supported by renewed increases in output and stocks of purchases, as well as a slightly larger rise in employment. However, demand conditions remained muted, with both overall new business and new export sales decreasing again in June. Turning to prices, the rate of input cost inflation held close to May lows but remained sharp, while prices charged inflation remains among the softest seen over the past four years. Business confidence around the year ahead was little changed from May, and weaker than the historical trend.

South Korea May 1-20-day exports confirmed an export recovery, with average daily exports of 12.2% y/y, but there is still a long way to go. South Korea’s exports were down nearly 1% versus a year earlier in the January-May period. Auto exports fell 2.5% y/y to $30bn, with shipments to the U.S. plummeting 16.6%. Exports of petroleum and petrochemical products contracted by 21.5% and 10.6% y/y to $17.9bn and $18.3bn, respectively, as a consequence of the fall in global oil prices. Shipments of vessels rose 12% to $11.4bn, while those of wireless communication equipment climbed 11% y/y to $6.5bn and computer exports rose 12% to $4.5bn. Conversely, semiconductor exports increased 11% y/y to hit a record high of $58.3bn for the January-May period, thanks to robust demand for high-value products, such as high bandwidth memory (HBM) and DDR5. KOSPI -0.244% to 3014.47, USDKRW +0.818% to 1381.95, 10y KTB -2bp to 2.857%.

What We're Watching

U.S. June flash PMIs for manufacturing and services are expected to stay in the expansion zone but ease to 51 (May: 52) and 52.9 (May: 53.7).

U.S. May existing home sales is expected to drop for the second month at -1.3% after -0.5% drop in April.

Fedspeakers: Fed Vice Chair for Supervision Michelle Bowman and Fed Governor Christopher Waller speak at the International Journal of Central Banking Conference in Prague. Chicago Fed President Austan Goolsbee speaks in a moderated Q&A in Milwaukee. New York Fed President John Williams and Fed Governor Adriana Kugler host a Fed Listens event in Schenectady, New York.  

What iFlow is Showing

Mood: Sentiment has continued to deteriorate, with iFlow Mood falling deeper into negative territory and at risk of entering the “significant risk-off” zone if geopolitical tension escalates further. Net buying of equities eased, while core sovereign bonds saw a pick-up.

FX: NOK and TWD posted the most significant inflows, while IDR, HKD, THB and CLP were most sold. There was light USD and JPY buying vs. outflows for EUR, GBP, CHF and AUD.

FI: Strong buying flows in Japanese and South African government bonds followed by demand for U.S. Treasurys and Eurozone sovereign bonds. Notable selling was seen in U.K. gilts and Colombia, Thailand, Poland and Israel bonds.

Equities: Broad selling pressure globally, except for good buying flows in Japan and Sweden. South Korea, Malaysia, South Africa and Mexico equities were most sold.

Quotes of the Day

“You can bear your troubles or shrug them off. They’re your shoulders.” – Robert Breault

“If I have seen further than others, it is by standing upon the shoulders of giants.” – Sir Isaac Newton

Economic Details

UK consumer sentiment remained negative in June, with the S&P Global CSI slipping to 45.0 from 45.2. Households reported falling cash availability (15-month low) and rising job insecurity (49.2), despite modest income gains. Spending sentiment worsened, with views on making major purchases remaining weak, while appetite for unsecured credit rose to a 10-month high, driven by day-to-day needs. Access to credit tightened, especially in the public sector. Inflation pressures continued to erode purchasing power, prompting cautious consumption and reduced savings. Despite this, 43% of respondents now expect tighter Bank of England policy, up from 34% in May. FTSE 100 +0.024% to 8776.77, GBPUSD -0.342% to 1.3405, 10y gilt +1.8bp to 4.555%.

In May 2025, average monthly gross wages and salaries in Poland’s enterprise sector rose by 8.4% y/y to PLN 8,670.51. However, wages fell by 4.1% compared with April due to a lower incidence of additional payments such as bonuses and severance awards. The statutory minimum wage was raised to PLN 4,666 in January 2025, an 8.5% increase from July 2024, contributing to the annual wage growth. Average paid employment totaled 6,433.3k full-time equivalents, down 0.8% from May 2024 and 0.2% lower than in April. These figures cover enterprises with at least ten employees across a broad range of sectors including manufacturing, trade and services.

Poland’s industrial producer prices fell by 0.2% m/m and 1.5% y/y in May 2025. Compared with April, prices dropped in manufacturing (-0.2%), electricity, gas, steam and air conditioning supply (-0.5%) and water-related sectors (-0.1%), while mining and quarrying rose by 0.3%. Year-on-year, the largest decline was in mining and quarrying (-10.7%), particularly in coal and lignite (-20.9%), followed by electricity and gas (-1.6%) and manufacturing (-1.2%). Only the water supply and waste management sector posted a 2.5% annual rise. The steepest monthly and annual declines among manufacturing divisions were in coke and refined petroleum products. WIG -0.651% to 99752.46, EURPLN +0.19% to 4.275, 10y PGB +1.2bp to 5.654%.

France’s private sector activity deteriorated further in June, with the HCOB Flash Composite PMI falling to 48.5 from 49.3 in May. This marked a two-month low and the tenth consecutive month of contraction. The manufacturing PMI dropped sharply to 47.8 (May: 49.8), while the services PMI edged down to 48.7 (May: 48.9), both at two-month lows. Manufacturers saw the steepest fall in output since February, citing weak demand, excess inventories and postponed orders. New business and exports declined, job shedding accelerated, and backlogs fell for a 23rd month. Input cost inflation remained soft, while output prices rose only fractionally. Business confidence rebounded to an eight-month high despite continued uncertainty over fiscal policy, global trade and geopolitical risks. CAC40 -0.055% to 7585.51, EURUSD -0.443% to 1.1472, 10y OAT +3bp to 3.275%.

Taiwan’s unemployment rate fell by 0.02 percentage points to 3.30% in May 2025, with the seasonally adjusted and four-week measures also dropping to 3.34%. The number of unemployed persons decreased to 396,000, down 3,000 from April and 4,000 y/y. The labor force participation rate edged up 0.03 percentage points to 59.30%. Total employment increased by 6,000 (+0.05%) from the previous month to 11.611 million and was up 31,000 (+0.27%) compared with May 2024. At sector level, agriculture and industry gained 1,000 and 7,000 jobs, respectively, while services fell by 2,000. Year-on-year, services added 36,000 jobs, offset by declines in agriculture and industry. TAIEX -1.423% to 21732.02, USDTWD +0.715% to 29.729, 10y TGB -3bp to 1.461%.

Australia’s June flash PMI was unchanged at 51.0, while services surged to 51.3 from 50.6 in May. June data indicated that business activity in Australia’s private sector expanded at a faster pace. This was underpinned by greater new business inflows, though export orders shrank sharply. Growth in new work was notably driven by domestic clients, as new export orders returned to contraction. The rate of reduction was sharp – the fastest in nearly a year – amid a broad-based fall in foreign demand. Where lower export orders were reported, panelists often indicated that U.S. trade policy had impacted trade. Sentiment improved midway through the year, while staffing levels also continued to rise. Turning to prices, rates of input cost and output price inflation slowed at the end of the second quarter, the latter falling to the lowest level in over four-and-a-half years. ASX +0.089% to 4769.51, AUDUSD -0.496% to 0.642, 10y ACGB +3.4bp to 4.217%.

India’s preliminary June PMI for manufacturing and services both improved, to 58.4 (May: 57.6) and 60.7 (May: 58.8), respectively. Indian companies scaled up output in response to faster increases in total new business intake and international sales. In particular, the upturn in export orders was the strongest since comparable data records began in September 2014. With pending workloads continuing to accumulate, firms remained in hiring mode. Meanwhile, charge inflation softened as input costs rose at the slowest pace in ten months. SENSEX -0.405% to 82074.69, USDINR +0.151% to 86.72, 10y INGB +0.9bp to 6.318%.

Singapore May CPI eased, with the headline rate at 0.8% y/y (April: 0.9% y/y) and core inflation at 0.6% (April: 0.7%). The lower headline inflation is due to lower private transport inflation. Singapore’s MTI is maintaining core inflation and all-items inflation projections at an average of 0.5-1.5% in 2025. Slowing GDP and easing CPI are likely to see further MAS easing. The situation is tricky for the MAS, as SGD’s valuation is back to its high, despite twice easing in January and April 2025. STI -0.27% to 3872.96, USDSGD +0.265% to 1.2904, 10y SGB -1.1bp to 2.292%.