Key Highlights

• President Trump announces that ceasefire between Iran and Israel is “now in effect.” Oil prices are down 15% to $66.4, from $78.4 on Monday.

• Israel identifies post-ceasefire missiles from Iran. Defense Minister Katz says Israel will respond “forcefully,” but Iran denies firing after the ceasefire.

• German Ifo business climate up 0.4 to a one-year high of 88.4 as the country plans a 70% increase in military spending, faster than U.K. and France; Spain opts out of NATO plan.

Chart of the Day

EXHIBIT #1: OIL FLOW MOMENTUM BEGINNING TO FALTER AS ENERGY HOLDINGS APPROACH 2024’S AVERAGE LEVEL

^{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 improved, as global equities rallied on the back of weaker oil prices after President Trump announced an Israel-Iran ceasefire. Chinese and South Korean shares gained the most, with oil prices and supply a key factor. KRW climbed more than 1.7% to 1,357, with USD down 0.3% overall against G10 currencies. Bonds globally are mixed, with a focus on European military spending plans balanced against disinflation hopes from energy. Overnight, the risk rally stuttered following further missile attacks, calling into question the uneasy peace. Hopes of moving on from this conflict to the next remain alive, with NATO meetings and the U.S. Senate Tax Bill debate both key. Today brings another important element in sustaining the equity bounce-back, as FOMC Chair Jerome Powell testifies on the state of the economy. This could support the shift to a July cut, like other Fedspeakers yesterday. U.S. bonds are seeing the yield curve steepen even in the supply context, with today’s 2y note sale the start of this test. How markets handle a return to “normal” will matter, as the speed of change in sentiment has left many investors uneasy about the uncertainty ahead. The news agenda is heavy, with regional Fed surveys, house prices, more Fedspeakers, EM rate decisions and Canadian CPI to come. Between rates, taxes, tariffs and other global conflicts, all on a deadline for end-Q2, the current price action reflects reduced convictions about the rest of the year. What has most notably changed is the role of oil in measuring the mood, with the return of bond yields and the USD as the unsteady risk barometers.

What You Need to Know

German business sentiment improved in June, with the Ifo expectations index rising to 90.7 from 89.0 in May and the current conditions index increasing from 87.5 to 88.4. According to the Ifo institute, expectations brightened significantly, indicating the economy is slowly regaining confidence. Sectoral data showed manufacturing sentiment improving marginally, with its diffusion index rising from -13.8 to -13.7, while services returned to expansion, jumping from -0.4 to 3.8. The upbeat tone follows recent survey data showing a rebound in business activity, supported by the government’s approval of a 2025 budget that includes a €500bn infrastructure fund and plans to raise military spending to 3.5% of GDP by 2029. DAX +2.023% to 23739.82, EURUSD +0.13% to 1.1593, 10y Bund +1.4bp to 2.521%.

Germany’s federal and state governments reached a deal on sharing the cost of a €46bn tax relief package aimed at stimulating economic growth. The federal government will cover corporate tax cut losses for municipalities until 2029 using sales tax revenue and provide states with an additional €8bn in support programs. The agreement, vital for Chancellor Friedrich Merz and led by Finance Minister Lars Klingbeil, unlocks the path to finalizing the 2025 budget, approved on Tuesday; it includes €82bn in new debt for this year, rising to €126bn by 2029. Measures include extended depreciation periods for machinery and EVs and a planned corporate tax cut from 2028, with added support for eastern German states.

Spain’s decision to opt out of NATO’s new 5% of GDP defense spending target has sparked a backlash ahead of the alliance’s summit in The Hague. While most members backed the pledge – split into 3.5% for core military and 1.5% for infrastructure and cyber – Spain secured a last-minute exemption, committing instead to just 2.1% of GDP. This was achieved through a change of wording in the final statement and a private letter from NATO chief Mark Rutte granting flexibility if Spain meets broader capability targets. Poland called the exemption “unjustified” and harmful to alliance unity, while Belgium has indicated it may seek similar treatment. Other officials warned Spain’s opt-out risks undermining summit cohesion. IBEX 35 +1.269% to 13944, EURUSD +0.13% to 1.1593, 10y Bono +0.1bp to 3.199%.

Sweden’s Ministry of Finance downgraded its 2025 GDP growth forecast to 0.9% from 1.8% in May, citing weak household consumption and investment. Growth is expected to recover in the second half of the year, reaching 2.6% in 2026. Unemployment is forecast to average 8.7% in 2025, unchanged from May. Inflation is easing, with the CPIF projected to come in at 2.4% this year and 1.7% in 2026. Despite weak near-term momentum, public finances remain strong, with one of the lowest debt-to-GDP ratios in the EU. Confidence among businesses is steady, while consumer sentiment has weakened. The policy focus remains on supporting household finances and investment to boost long-term growth. OMX +2.063% to 2474.039, EURSEK -0.199% to 11.0914, 10y Swedish GB -0.6bp to 2.277%.

What We're Watching

MNB decision – The National Bank of Hungary is expected to keep its benchmark interest rate unchanged at 6.50%. Inflation slowed to 4.7% in March from 5.7% in February, driven mainly by lower fuel prices, although food and services costs remain sticky. MNB will likely show a stronger easing bias in future decisions.

BCC decision – The Central Bank of Chile is widely expected to leave its benchmark rate unchanged at 5.0%. Markets are pricing in a steady policy stance until there are clearer signs that inflation is sustainably returning to target without jeopardizing financial stability. Even though we see a pick-up in carry interest, with MXN, COP and BRL leading the way in LatAm, Chile’s rates are not favorable compared with peers.

U.S. April FHFA home prices expected to hold at 0% after -0.1% m/m, while the S&P Case-Shiller index is expected to come in 0% from -0.12% m/m, dropping to 3.94% y/y from 4.07% y/y.

U.S. Treasury sells $69bn in U.S. 2y notes.

U.S. June Richmond Fed Manufacturing index forecast to deteriorate further to -10 from -9 in May.

U.S. June Conference Board consumer confidence is expected to improve to 99.8 from 98 in May, with a focus on the “jobs hard to get” index.

Canada May headline CPI is expected to rise to 0.5% m/m (April -0.1%), while unchanged y/y at 1.7%. Median and trim inflation are expected to come in at 3.0% y/y, from 3.2% y/y and 3.1% y/y, respectively.

Fed Chair Jerome Powell testifies before the House Financial Services Committee.

Other Fedspeakers: New York Fed President John Williams gives keynote remarks at an event in Albany, New York. Boston Fed President Susan Collins speaks on housing.

What iFlow is Showing

Mood: iFlow Mood dropped into the risk-off zone, in a sharp about-turn from last week’s risk-on mode. The lowering of iFlow Mood was driven by easing demand for equities combined with a pick-up in flight-to-quality buying of core sovereign bonds.

FI: Japanese, Eurozone and South African government bonds posted the most inflows. Thailand, Israel and Poland government bonds were most sold. Elsewhere, flows were biased to buying.

Equities: Broad outflows with selling across emerging markets and developed markets. South Korea and Malaysia were significantly sold, followed by Mexico, the U.S., Canada and Hong Kong, against light buying in Japan, Sweden, Colombia and Israel. 

Quotes of the Day

“…till we are uneasy in Rest, we can have no Desire to move, and without Desire of moving there can be no voluntary Motion.” – Benjamin Franklin

“I think pressure is that uneasy feeling that you feel when you’re unprepared.” – Tom Herman

Economic Details

U.K. grocery volumes fell 0.4% y/y in the four weeks to 15 June, in the first decline this year. This was despite a 4.1% rise in take-home sales. Footfall hit a five-year high, with 490 million shopping trips made, although average spend per trip dipped slightly to £23.89. Grocery inflation rose to 4.7%, the highest since March 2024. Shoppers responded by favoring own-label products (+4.2%) and promotions, which accounted for 28.8% of spending. Fresh and exotic fruit saw strong demand, while usage of GLP-1 weight loss drugs doubled, with many users reporting intentions to reduce snack purchases. Several retailers recorded strong growth, particularly those with discount or convenience formats. FTSE 100 +0.375% to 8790.91, GBPUSD +0.54% to 1.3597, 10y gilt +1.7bp to 4.509%.

Poland’s retail sales rose 4.4% y/y in May 2025 at constant prices, slightly below the 5.0% increase in May 2024. On a monthly basis, sales declined 3.2%, and were down 2.0% m/m after seasonal adjustment. Over January-May, sales increased by 3.5% y/y. By category, the largest annual rises were in furniture, electronics and household appliances (+18.9%), motor vehicles and parts (+15.7%) and pharmaceuticals (+6.0%). Food, beverages and tobacco rose 1.5%, while the “others” category fell 10.8%. Online sales rose 6.2% y/y, with the internet’s share of total retail climbing to 8.8%. The biggest online growth came from clothing and household electronics, while book-related sales saw a decline. WIG +1.532% to 100500.5, EURPLN -0.253% to 4.2612, 10y PGB -7.4bp to 5.544%.

In June 2025, Türkiye’s seasonally adjusted confidence indices showed mixed performances. Services confidence rose by 0.4% to 110.9, supported by improvements in recent business conditions (110.2, +0.4%) and past demand-turnover (110.1, +1.1%), though expectations for future demand fell slightly to 112.3 (-0.4%). Retail trade confidence shrank 2.5% to 108.5, driven by weaker business activity (119.6, -1.3%), a drop in current stock volumes (89.6, -2.9%) and lower future sales expectations (116.4, -3.0%). Construction confidence fell 1.7% to 86.9, as both order books (83.3, -1.2%) and employment expectations (90.7, -1.4%) weakened. Services was the only sector to improve, while retail and construction recorded broad-based declines versus May. BI 100 +2.249% to 9346.86, USDTRY +0.072% to 39.6443, 10y TGB -52bp to 33.01%.

Czechia’s composite economic sentiment indicator slipped by 0.9 points to 100.1 in June, as business confidence declined while consumer confidence held steady. The business confidence indicator fell by 1.0 points to 100.0, driven by a 3.7-point drop in trade and a 2.8-point decline in selected services, though confidence rose in construction (+6.5 points) and marginally in industry (+0.3 points). Consumer confidence was unchanged at 100.7. Households’ assessments of the current and expected financial situation and the overall economic outlook were stable compared with May. However, a slightly higher number of respondents reported no plans for large purchases over the next year. Prague SE +0.45% to 2136.24, EURCZK -0.137% to 24.793, 10y CZGB -2.9bp to 4.279%.

Japan’s department store sales in May 2025 totaled ¥435.6bn, down 7.0% y/y – the fourth straight monthly decline. Sales fell 8.1% in regional cities and 5.6% in the ten major cities. Duty-free sales (inbound segment) dropped 40.8% y/y to ¥42.5bn, with a sharp 8.9-point decrease in the average unit price and a 5.4% fall in foreign visitors. Domestic sales (excluding inbound) dropped 2.1%, driven by lower demand for summer items due to unseasonably cool weather. Sales in the Tokyo metropolitan area fell 5.6%, while regional areas recorded broader weakness across apparel and luxury goods. Store visitors were down 2.8% y/y. May had the same number of weekend/holiday days as last year, so calendar effects were neutral. Nikkei +1.138% to 38790.56, USDJPY -0.774% to 145.02, 10y JGB +0.8bp to 1.423%.

South Korea June consumer confidence surged from 101.8 to 108.7, the highest since June 2021 (110.5). Consumer sentiment regarding current living standards was 92 (May: 90), while the figure for the future outlook was 101 (May: 97). Consumer sentiment related to future household income was 102 (May: 99), while the figure for future household spending was 110 (May: 108). Consumer sentiment concerning current domestic economic conditions was 74 (May: 63), against 107 for future domestic economic conditions (May: 91). The one-year-ahead expected inflation rate eased from 2.6% to 2.4% while the three-year and five-year-ahead expected rates were both down 0.1 percentage points to 2.4%. KOSPI +2.958% to 3103.64, USDKRW -1.661% to 1359.4, 10y KTB +1bp to 2.867%.

Malaysia May inflation eased further to 1.2% from 1.4%. While our view remains that BNM will maintain the status quo at its July meeting, the lowest headline CPI reading since Feb 2021 raises the probability of a BNM rate reduction later in the year. May core inflation saw its first decline since December 2024, to 1.8% from 2.0% in April. KLCI -0.171% to 1514.01, USDMYR -1.037% to 4.248, 10y MGB -0.2bp to 3.586%.