Muzinich Weekly Market Comment: Tail risk returns

June 16, 2025

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In our latest roundup of the key developments in financial markets and economies, we look at the potential impacts of an escalation in the Israel-Iran conflict.

Financial markets remained subdued from Monday through Thursday last week, with the main economic theme a continued easing of inflationary pressures. In the UK, wage data came in softer than expected;^[1] in the US, consumer^[2] and producer price increases^[3] were significantly below forecasts. Meanwhile, French consumer prices declined by 0.1% from the previous month,^[4] and Indian inflation fell to a five-year low, mainly due to lower food prices.^[5]

Confidence in central banks’ commitment to anchoring inflation expectations supported a broad, parallel decline in government bond yields worldwide. Even the 30-year US Treasury bond, unloved in recent times, attracted strong demand at auction, with total bids reaching US$53.8 billion for US$22.4 billion of bonds sold.^[6]

Credit spreads continued to tighten, with investment-grade debt benefiting from falling government bond yields. Meanwhile, high-yield credit remained well-supported due to a technical imbalance of shrinking supply and growing demand from yield-seeking investors, pushing prices higher and spreads lower.

Equity markets also moved higher, supported by relief that trade talks in London between the US and China seemed to have concluded successfully. President Trump announced on social media, “OUR DEAL WITH CHINA IS DONE,” restoring the flow of critical magnets from China and the US pledging to lift restrictions on student visas. Additionally, US Commerce Secretary Howard Lutnick confirmed Washington would unwind recent technology curbs if supplies of niche metals essential to the US automotive and defence sectors resumed at an adequate pace.^[7]

Both countries agreed to keep existing tariffs in place at levels set during initial negotiations in Geneva: the US will maintain its overall tariff rate of around 55% on Chinese imports — covering key sectors such as electric vehicles, semiconductors, batteries, and critical minerals — while China will continue to apply tariffs averaging 10–15% on US agricultural products and select goods.

Israel-Iran strikes shatter calm

Only one market diverged sharply from the broader calm: commodities. Both gold and oil prices climbed steadily throughout the week as investors focused on rising tensions in the Middle East. Those concerns proved well-founded late Thursday, when Israel launched airstrikes targeting Iran’s nuclear and ballistic missile programmes. Those operations continued into Friday, reportedly killing the commander of Iran’s Revolutionary Guard, dealing a blow to the country’s military leadership. In response, Iran vowed severe retaliation and launched more than 100 drones toward Israel.^[8]

Iran has long been subject to international suspicion over its nuclear ambitions and whether it is secretly working to develop atomic weapons. In recent years, the Islamic Republic has ramped up production of fissile material and is now believed to be capable of producing enough enriched uranium for a bomb in under a week.

Despite the scale of Israeli strikes, the UN nuclear watchdog, the International Atomic Energy Agency, said there was no measurable damage to Iran’s main nuclear enrichment facilities or signs of increased radiation, but added Iran is still failing to comply with its commitment to nuclear safeguards.^[9]

The US said it had prior knowledge of the Israeli strikes but warned Iran not to target American interests in the region. President Trump, posting on Truth Social, urged Iran to return to the negotiating table “before it is too late,” suggesting Tehran still has “perhaps, a second chance” to strike a deal.^[10] Israeli Prime Minister Benjamin Netanyahu said the attacks were aimed at neutralizing Iran’s nuclear and missile capabilities, emphasizing operations would continue “for as many days as it takes” to eliminate the threat.^[11]

Risk reassessment

As markets opened last Friday, investors began to reprice risk across asset classes in response to the escalating conflict. Our preferred measure of market sentiment, the VIX, broke above 20, a level that signals a marked increase in uncertainty and risk aversion.^[12]

The primary concern for investors and businesses is the potential for supply chain disruptions, particularly for goods and commodities transiting the Strait of Hormuz. This is a narrow but critical waterway at the mouth of the Persian Gulf through which approximately 11% of global seaborne trade and nearly 39% of the world’s crude oil shipments pass (see ‘Chart of the Week’).^[13]

In addition, markets are monitoring whether strikes could expand to target energy infrastructure, such as refineries and oil export facilities, further exacerbating an energy supply shock to the global economy.

Concerns quickly played out in the oil market, with the spread between the nearest delivery contract and subsequent contracts, known as the time spread, widening notably.^[14] This suggests buyers are scrambling to secure near-term supply. Brent crude briefly surged to US$78 a barrel on Friday, marking the largest intraday jump since Russia’s invasion of Ukraine in March 2022, before settling around US$74 per barrel, up approximately 6% on the day.^[15] European natural gas prices, heavily dependent on imports from the Middle East, also rallied, rising about 4% as concerns about potential supply disruptions increased.^[16]

Oil, inflation and growth

A sustained rise in oil prices could significantly hamper economic growth and push inflation higher. In a worst-case scenario, this could lead to stagflation, marked by stagnant growth and high inflation, similar to the oil crises of the 1970s.

In October 1973, OPEC, led by Arab members, imposed an oil embargo in response to Western support for Israel during the Yom Kippur War. A second shock followed in 1979 after the Iranian Revolution disrupted global oil supply and fuelled further price surges.^[17]

Financial markets adjusted risk premiums on Friday to reflect this new tail risk. Government bond yields rose in line with heightened inflation fears, while credit and equity markets softened, factoring in potentially tighter profit margins and lower volumes. The Bloomberg World Large & Mid Cap Index fell 0.35%, while gold, a traditional safe haven in a stagflationary environment, hit a new all-time high, and is up 30% year-to-date.^[18]

Investors always need to keep in mind worst-case scenarios. In this situation, that might entail a combination of a blockade of the Strait of Hormuz, significant damage to Iran’s oil infrastructure (which currently produces an estimated 3.3 million barrels per day)^[19], and retaliatory attacks on regional oil facilities outside Iran that could severely disrupt global supply. In such a scenario, it is reasonable to assume oil prices could surge to around US$100 per barrel or higher.

Iran has never fully closed the Strait of Hormuz, partly because doing so would cut off its own vital oil exports and potentially trigger a military response from the United States and its allies. Furthermore, the US has stated that it was not involved in the recent escalation and prefers a diplomatic resolution, remaining hopeful talks can continue — reducing the incentive for Iran to retaliate against broader regional energy infrastructure. As for the Israeli offensive, it has so far focused on Iran’s nuclear and military capabilities; Iranian oil infrastructure has not been attacked, although this remains the biggest risk for escalation or miscalculation.

It is worth noting Saudi Arabia and the United Arab Emirates maintain significant spare production capacity. Historical analysis of supply disruptions suggests that, on average, increased output from Saudi Arabia and the UAE typically offsets about 80% of disrupted production within two quarters.^[20] Through April, May and June, OPEC+ members increased their combined supply by nearly 1 million barrels per day, with an additional 800,000 barrels per day expected to return following its July and August meetings.^[21]

Tail risk

Global investors now face a new and potentially unexpected tail risk, which could lead to a further readjustment of risk premia over the coming days. However, if the worst-case scenario does not materialize — where stagflation would almost certainly occur, as it did during the previous two major oil supply shocks — OPEC+ has sufficient spare capacity to cover any shortfall.

On that basis, supply risk could gradually subside over the next quarter. However, the recent trend in falling consumer and producer prices may have bottomed; as such, we think central banks, keen to show their commitment to anchoring inflation, are likely to refrain from any changes to monetary policy over the summer months.

Chart of the Week: The importance of the Strait of Hormuz

Source: Clarksons Research, ‘Strait of Hormuz: Share of global seaborne trade volumes,’ as of December 2024. For illustrative purposes only.

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of June 16, 2025, and may change without notice. All data figures are from Bloomberg, as of June 13, 2025, unless otherwise stated.

 

References

[1] Office for National Statistics, Average weekly earnings in Great Britain, June 10, 2025
[2] Bureau of Labor Statistics, CPI Summary May, June 11, 2025
[3] Bureau of Labor Statistics, PPI Summary May, June 13, 2025
[4] Insee, CPI, June 14, 2025
[5] Ministry of Statistics & Programme Implementation, CPI, June 12, 2025
[6] Bloomberg, ‘US 30-Year Bond Sale Spurs ‘Sigh of Relief’ After Weeks of Angst,’ June 12, 2025
[7] The Guardian, ‘Trump trade deal shows how vital China’s rare-earth metals are to US defense firms,’ June 11, 2025
[8] Associated Press, ‘Israel strikes Iran’s nuclear sites and kills top generals. Iran retaliates with missile barrages,’ June 14, 2025
[9] Al Jazeera, ‘UN nuclear watchdog board finds Iran not complying with obligations,’ June 12, 2025
[10] CNN, ‘Trump warns Iran to agree to a deal ‘before there is nothing left,’ June 13, 2025
[11] Government of State of Israel, ‘Statement by Prime Minister Benjamin Netanyahu,’ June 13, 2025
[12] CBOE, 'Chicago Board Options Exchange Volatility Index,' as of June 13, 2025
[13] Clarksons Research, ‘Strait of Hormuz: Share of global seaborne trade volumes,’ as of December 2024
[14] MacroMicro, WTI Calendar Spread, as of June 13, 2025
[15] Oilprice.com, Brent Crude, as of June 13, 2025
[16] European Energy Exchange, EEX Natural Gas Spot Index, as of June 13, 2025
[17] Yale University, ‘The oil shocks of the 1970s – energy history,’ as of June 2025
[18] The Royal Mint, Gold price, as of June 13, 2025
[19] OPEC, ‘Monthly Oil Market Report,’ May 14, 2025
[20] Goldman Sachs, ‘Oil Comment: Higher risk premium near term,’ June 13, 2025
[21] OPEC, ‘OPEC+ reaffirm commitment to market stability, May 31, 2025

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