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Morning Brief: Rising Geopolitical Risks and Rate Pressure Weigh on Markets, AI Keeps Equities Afloat

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Global markets are facing mounting pressure from geopolitical tensions and persistent inflation risks, even as the Federal Reserve holds rates steady. Rising energy prices linked to Middle East tensions are complicating the inflation outlook, while bond yields and the dollar strengthen. Despite weakening growth expectations, the artificial intelligence (AI) theme continues to support equity markets, particularly in the technology sector.

Fed Holds Rates, Signals Growing Internal Divide

The Federal Reserve left its policy rate unchanged at 3.50%–3.75% following its April FOMC meeting, in line with market expectations.

However, the decision revealed increasing divisions within the Fed:

  • Rising inflation concerns linked to energy prices
  • Diverging views on the timing of rate cuts
  • A notable split in voting patterns

Four dissenting votes marked one of the sharpest internal disagreements in over three decades, highlighting growing uncertainty over the policy path.

Powell’s Final Meeting and Transition Signals

Fed Chair Jerome Powell, presiding over what is expected to be his final meeting as chair, emphasized the importance of central bank independence amid political pressure.

Powell is set to hand over leadership to Kevin Warsh, but indicated he may remain on the Board. This transition adds another layer of uncertainty to the policy outlook.

Markets interpreted the overall message as a pause in the rate-cut cycle, with easing expectations pushed further out.

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Markets React: Yields and Dollar Strengthen

Following the Fed decision:

  • US 10-year Treasury yields rose to 4.43%
  • The dollar index (DXY) strengthened

Futures markets now suggest that rate cuts are less likely in the near term, with some pricing indicating a prolonged period of tight monetary policy extending into 2027.

Gold and Silver Under Pressure

Higher yields and a stronger dollar weighed on precious metals:

  • Gold dropped toward $4,500
  • Silver slipped below $71

The break of key technical levels suggests that near-term downside risks remain, although the longer-term outlook for metals remains constructive.

Strait of Hormuz Tensions Shake Energy Markets

Geopolitical risks are centered around the Strait of Hormuz, a critical global energy chokepoint.

The US Energy Information Administration (EIA) warned that a full disruption could represent:

  • One of the largest and most abrupt supply shocks in oil market history

Ongoing restrictions and blockade conditions are already impacting:

  • Global trade flows
  • Supply chains

Brent crude has surged toward $123 per barrel, intensifying inflation fears.

Focus Turns to ECB and BoE Decisions

Attention now shifts to upcoming policy decisions from:

  • European Central Bank (ECB)
  • Bank of England (BoE)

Despite rising energy-driven inflation, both central banks are expected to hold rates steady for now, balancing inflation risks against slowing growth.

ECB rate hike expectations for June remain strong, while the BoE is expected to adopt a more cautious stance.

Risk Sentiment Weakens Across Global Markets

US equities closed slightly lower, while Asian markets followed with broader declines:

  • Tokyo and Hong Kong indices fell around 1.2%

However, technology stocks outperformed, supported by strong earnings from:

  • Alphabet
  • Microsoft
  • Amazon

AI Theme Continues to Support Equities

Despite tightening financial conditions and rising geopolitical risks, AI-driven optimism is preventing a deeper market downturn.

  • AI-linked tech stocks are outperforming
  • Traditional sectors remain under pressure

This divergence highlights AI’s role as a key growth narrative in an otherwise fragile macro environment.

Turkish Markets Under Pressure

Global risk-off sentiment is also affecting Türkiye:

  • Banking stocks have declined for seven consecutive sessions
  • Government bond yields are rising
  • USD/TRY climbed to 45.18
  • CDS spreads widened to 255 basis points

The Central Bank of the Republic of Türkiye (CBRT) showed no significant change in net FX reserves.

Macro Data: Labor Market and Confidence Weaken

Recent domestic data showed:

  • A decline in headline unemployment
  • Continued increase in broad-based unemployment

Meanwhile, the economic confidence index weakened, reflecting the impact of geopolitical tensions.

Key Watch Points: Oil and US Inflation Data

Markets are closely monitoring:

  • Oil price developments
  • Geopolitical headlines
  • US Personal Consumption Expenditures (PCE), the Fed’s preferred inflation gauge

Conclusion: Rising Risks, AI Provides Temporary Cushion

Global markets are navigating a complex environment shaped by:

  • Geopolitical tensions
  • Energy-driven inflation
  • Prolonged tight monetary policy

While AI-driven optimism is providing short-term support, overall risk appetite remains fragile.

By Emre Degirmencioglu, Kıbrıs Iktisat Bank

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