WEEKLY UPDATE-The repercussions of the war in the Middle East still in the crosshairs of the markets

(Updated with results of the first round of the presidential election in Colombia)

Efforts by Tehran and Washington to extend the ceasefire and reopen the Strait of Hormuz continue to dominate market attention, while data from the United States and the Eurozone are expected to shed more light on the economic fallout from the conflict.

Indian officials must deal with the repercussions of the national currency crisis and the very select club of technology companies whose market capitalization exceeds 1,000 billion dollars seems destined to grow.

Overview of market prospects in the days to come:

1/ TIME OF EMPLOYMENT

The next monthly report on employment in the United States will test the markets, as well as the new chairman of the Federal Reserve (Fed), Kevin Warsh, at a time when investors are especially attentive to inflationary pressures.

According to a Reuters poll, the figures for May, which will be published on Friday, should show a slowdown in job creation, to 96,000 jobs, and an unemployment rate of 4.3%.

However, this would follow the creation of 115,000 jobs in April, a figure higher than forecast which shows that the labor market continues to show resilience.

Data relating to manufacturing and services should provide more insight into economic dynamics.

The slightest sign of overheating could disrupt markets, as inflationary fears are already driving bond yields higher.

Inflation remains well above the Fed’s 2% target ahead of Kevin Warsh’s first meeting as president of the US central bank, scheduled for June 17.

Markets now believe there is a greater chance of a rate hike than a rate cut in 2026, despite calls from President Donald Trump for an easing of monetary policy.

2/ IMPLICATIONS

For officials at the European Central Bank (ECB), the central question is to what extent rising energy prices are fueling overall inflation.

Eurozone inflation figures for May, due Tuesday, should provide some answers, especially as the conflict in the Middle East has dragged on long enough for second-round effects to begin to appear.

Analysts expect inflation of 3% over one year, but 2.2% if we exclude the volatile costs of food and energy.

The ECB appears determined to raise rates by 25 basis points in June, but the outlook beyond that date is less certain. Money markets anticipate at least one, if not two, additional increases this year.

Everything will depend on the evolution of inflation. Philip Lane, ECB chief economist, warned that the energy shock could prove persistent and have lasting impacts on prices, while stressing that it differs from the surge four years ago linked to the war in Ukraine and the post-COVID recovery.

The Frankfurt institute also highlighted in a study that consumers in the euro zone are now more sensitive to the economic impact of geopolitical upheavals such as the war in the Middle East.

3/ WELCOME TO THE CLUB The club of companies with a market capitalization of $1,000 billion has expanded further with the arrival of the South Korean company SK Hynix 000660.KS and the American company Micron Technology MU.O.

Led by Nvidia NVDA.O, whose valuation exceeds $5,000 billion, this group is dominated by companies that are at the heart of the rise of artificial intelligence (AI).

These new entries highlight the strength of the AI-driven rally, even as the war in Iran drags on and worsens the global energy crisis.

Investors now face a well-known dilemma: pursue a strategy or be more concerned about concentration risk, with the best-performing markets potentially being the most vulnerable if investor sentiment changes.

4/ THE RUPIE AT LOWEST The depreciation of the Indian rupee to historic lows has fueled bets on a rate hike on June 5, despite signals that the Reserve Bank of India (RBI) is reluctant to use monetary policy to support the currency.

The rupee INR= briefly touched 97 to the dollar on May 22, before apparent central bank intervention stabilized markets.

Its heavy dependence on imported oil exposed India to the impact of the war in Iran, leading to capital outflows and weighing on the currency.

While three sources told Reuters that the RBI was in no rush to raise rates, some major banks are counting on such a decision in June.

The operators are for their part divided equally between those who are banking on an increase and those who lean towards the status quo, even if it is possible that some were encouraged by the surprise increase decided a few days ago by Sri Lanka.

5/ ELECTIONS IN COLOMBIA

The first round of the presidential election held on Sunday in Colombia left far-right outsider Abelardo de la Espriella ahead of left-wing senator Ivan Cepeda, after a campaign marked by economic issues and populist policies.

After counting more than 97% of the ballots, Abelardo de la Espriella is credited with 43.7%, compared to nearly 41% for Ivan Cepeda, designated successor to outgoing president Gustavo Petro whom opinion surveys gave at the top of this first round but defeated in the second.

While neighboring Brazil is also preparing to experience a hotly contested election in October between President Luiz Inácio Lula da Silva and his right-wing rival and former head of state, Flavio Bolsonaro, the substance of the debate is well known: the markets are are less concerned with ideology than with a credible budgetary policy and the control of inflation.

(Graphiques Mayank Munjal, compiled by Karin Strohecker, French version Diana Mandiá, edited by Augustin Turpin)