Morning Bid: Geopolitics, rate decisions keep markets cautious

A look at the day ahead in European and global markets from Johann M Cherian

Speculation over potential U.S. intervention in the Middle East has grabbed the market's attention this week, rattling investors who were otherwise focused on a series of central bank meetings that are expected to give outlooks on growth and inflation.

President Donald Trump was keeping the world guessing on whether the U.S. might join Israel's air campaign against Iran, telling reporters outside the White House on Wednesday: "I may do it. I may not do it. I mean, nobody knows what I'm going to do." Bloomberg News also reported that senior U.S. officials are preparing for a possible strike on Iran in the coming days.

This ambiguity has kept markets on edge for nearly a week now, while cracks are emerging among Trump's support base, some of whom fear the president may stray from his isolationist foreign policy stance.

Investors have learned to be patient in their response to Trump's often unpredictable policymaking style, although analysts warn that any sign of escalation in the Middle East could spark a knee-jerk reaction in financial markets.

Global stocks have steadily cooled after a recent rally, and analysts say the markets' biggest worry remains the lack of headway towards highly anticipated trade deals with Trump's tariff deadline less than a month away. [MKTS/GLOB]

Investors in developed-market bonds have approached the traditionally safe-haven assets with some trepidation. Ten-year bonds in Germany, Britain and the U.S. have been trading in tight ranges over the past few sessions.

Amid all the uncertainties, markets are weighing potential inflationary pressures that could keep central banks hawkish. Increased military spending in the U.S. and European economies could drive up government debt levels and undermine the already waning appetite for developed-market bonds.

On Wednesday, optimism around the Federal Reserve signalling lower borrowing costs this year was immediately tempered by Chair Jerome Powell's statement that he expects tariffs to add to inflation pressures.

The Bank of England will most likely flag the repercussions from a recent spike in crude oil prices when it announces its rate verdict later today, despite signs that price pressures cooled as expected last month.

Policy decisions today by central banks in Switzerland and Norway will also be in focus, after the European Central Bank earlier this month chose to err on the side of caution when it hinted at a pause to its rate-cutting cycle.

Key developments that could influence markets on Thursday:

- Central bank decisions due out of Britain, Switzerland, Norway and Taiwan

- Commentary from ECB's Luis de Guindos, Francois Villeroy de Galhau

- Eurogroup meeting in Luxembourg

- Eurozone finance ministers to discuss Bulgaria's euro adoption, fiscal recommendations

- U.S. markets closed for Juneteenth National Independence Day

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(By Johann M Cherian; Editing by Edmund Klamann)