An oil price graph, dollar, and interest rate indicators are overlaid on an oil tanker passing through Middle Eastern waters. This week, the market kept a close eye on variables involving U.S.-Iran negotiations and risks in the Strait of Hormuz, while simultaneously repricing anxieties through the PCE results meeting expectations and a decline in interest rates. [Photo=Han-Mi-Ilbo Graphic]

The global financial market in the fourth week of June started off quietly due to the Juneteenth holiday in the U.S., but it quickly became a week of reassessing directionality as Middle East risks, inflation data, and interest rate trends intertwined. What shook the market early in the week was the news that U.S.-Iran working-level negotiations had been canceled. As the talks scheduled in Switzerland were postponed, major European indices weakened, and international oil prices climbed to the $77-per-barrel range, reflecting a "Middle East risk premium."

There were three checkpoints last week.

First, whether passage through the Strait of Hormuz would actually be blocked.

Second, whether rising oil prices would spill over into concerns regarding U.S. interest rates and inflation.

Third, whether risk assets were pricing in the Middle East risk as a full-scale war.

The market provided relatively calm answers to these three questions this week. Although risks remained, the market placed more weight on manageable uncertainty than on an all-out war.

The theme of this week’s trend is "pricing in anxiety."

Risks were clearly present, but they were not reassessed to the point of collapsing the entire market.

The trend shifted after mid-week. Oil prices stabilized quickly as news emerged of progress in U.S.-Iran negotiations, the maintenance of normal traffic in the Strait of Hormuz, and a temporary 60-day measure allowing for the production and sale of Iranian crude oil. WTI slid from $75.85 to $70.34, before rebounding to $71.92 following reports of a cargo ship being struck near Hormuz.

Middle East risks had not disappeared. However, the market recalculated these not at the price of a full-scale war, but at the price of manageable tension.

Interest rates also acted as a buffer against market shocks. The U.S. 10-year Treasury yield rose to 4.51% mid-week but fell to 4.39%, while the 2-year yield dropped from 4.23% to 4.12%. As the May PCE inflation data met expectations, fears of accelerating inflation were temporarily calmed.

The headline PCE was 4.1% year-on-year, and the core PCE was 3.4%, both in line with market expectations. While price levels remained high, what the market feared was "worse numbers." The fact that those numbers did not materialize acted as a factor of relief.

The exchange rate remained a burden. The dollar index rose from 100.85 to the 101.43 level, and the KRW/USD exchange rate also rose from the 1,530s to the 1,543 level.

The weakness of the Korean won placed a burden on foreign supply and demand in the Korean stock market and increased the sensitivity of domestic investors to overseas variables. The reason Korean assets fluctuated significantly, even though oil prices stabilized and interest rates fell, was the burden of the exchange rate.

The question for this week is this:

"Between Middle East risks and the relief from the U.S. PCE inflation data, what did the market focus on more?"

The answer is relatively clear. The market did not ignore the Middle East risks. However, it reflected the facts that the inflation data met expectations and interest rates fell more heavily than the possibility of oil prices skyrocketing to a 'full-scale war' price. That is why the Dow held its ground, the Nasdaq was pushed back by the cost burden of tech stocks, and oil prices fluctuated but did not explode.

The one-sentence conclusion is as follows:

"This week, the market did not deny the anxiety; rather, it repriced whether that anxiety was at a manageable level."

Next week’s checkpoints are three-fold.

First, we must confirm whether traffic through the Strait of Hormuz maintains a normal flow in terms of actual logistics and crude oil transport.

Second, we must watch whether WTI stabilizes in the low $70s or rises back above $75.

Third, it is important to see whether the U.S. 10-year yield holds around 4.4% or rises by reflecting inflation burdens again after the PCE. Whether the KRW/USD exchange rate crosses the 1,540 level and continues to rise will also be a key variable for supply and demand in the Korean stock market.

※ This material is for reference purposes summarizing market trends and is not a recommendation to buy or sell any specific financial product.