The Dow Jones Industrial Average fell 1.3%, slipping into negative territory for the year while the S&P 500 and the Nasdaq Composite recorded smaller losses and remained in positive territory for the year. Markets had risen through Thursday on upbeat economic data and signs of easing US-China trade tensions, including potential extensions to tariff pauses. However, sentiment reversed sharply Friday after Israel launched airstrikes on Iranian nuclear and military targets, prompting retaliation. The resulting surge in oil prices lifted energy stocks but dragged broader indexes lower, erasing the week’s earlier optimism.
Positive economic data helped support markets earlier in the week. May’s consumer price index (CPI) rose just 0.1% month over month, below expectations, while core inflation remained steady at 2.8%. Producer prices also undershot forecasts, suggesting muted tariff impacts. Bond yields fell on the soft inflation data, boosting Treasuries before pulling back slightly Friday due to Middle East tensions. Business and consumer sentiment improved with the National Federation of Independent Business’ optimism index rising to 98.8, and consumer sentiment climbed to 60.5, helped by easing inflation expectations and stabilising policy outlooks.
European markets fell amid US trade uncertainty and Middle East tensions, with the European STOXX 600 down 1.7%. Germany’s DAX dropped 3.2%, Italy’s FTSE MIB fell 2.9%, and France’s CAC 40 slipped 1.5%, while the UK’s FTSE 100 was flat. The UK economy shrank 0.3% in April, its sharpest monthly drop since October 2023, driven by declines in services and production. Unemployment rose to 4.6%, and wage growth slowed to 5.2%. Eurozone industrial output fell 2.4%, and the trade surplus shrank to EUR 9.9bn. European Central Bank (ECB) officials signalled a possible pause in rate cuts, despite weaker forecasts. Economist Tomasz Wieladek said further cuts may be limited, with ECB nearing the end of its easing cycle.
Japanese markets ended mixed amid rising geopolitical and trade tensions, with the Nikkei 225 up 0.3% and the TOPIX down 0.5%. A stronger yen, driven by safe-haven demand, pressured exporters, while the 10-year government bond yield fell to 1.40% amid tariff concerns. Investors looked to the G7 summit for progress in US-Japan trade talks, though Prime Minister Ishiba stressed the need for a balanced deal. Japan’s Q1 GDP was flat, an upward revision, while April industrial output dropped 1.1%. In China, stocks slipped as deflation persisted, with CPI falling for a fourth month and producer prices declining further. A preliminary US-China trade deal lifted markets midweek, but details remain pending.