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USD/JPY - Tariffs and Political Risks
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The US dollar has strengthened 1.7% since the start of July, reflecting a shift in how markets are responding to trade uncertainty. Despite ongoing tariff risks, expectations remain that the US administration will avoid economically damaging outcomes, while a firmer macro backdrop—marked by labour market resilience and record equity highs—is supporting investor confidence.
Meanwhile, the Japanese yen has come under pressure amid speculation that new tariffs and political uncertainty could delay Bank of Japan tightening. With the ruling coalition at risk of losing its upper house majority, and JGB yields reacting sharply, markets are increasingly pricing in a cautious BoJ stance and further yen weakness.
Europe Markets European markets mixed as Iran’s peace talks stall, defense stocks slide
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LONDON — European stocks traded in mixed territory on Monday as investors digest the latest impasse in peace negotiations between the U.S. and Iran.
The pan-European Stoxx 600 was oscillating above and below the flatline shortly after 8:40 a.m. in London (3:40 a.m. E.T.)
Regional sectors were broadly mixed. Regional bourses in London and Milan traded higher, while stock markets in Frankfurt and Paris were in negative territory.
European defense names retreated after Middle East peace talks, which lifted markets last week, appeared to have stalled.
German defense giant Rheinmetall was 3.6% lower, while tank parts maker Renk fell 3.2%. Leonardo, the Italian defense mainstay, dropped 4.4%, while Germany’s Hensoldt tumbled 3.4%. U.K. aerospace staple Babcock International slipped 3.5%.
The reversal came as U.S. President Donald Trump declared Iran’s counterproposal to end the war in the Middle East as “unacceptable”.
Negotiators have received Iran’s response to U.S. proposals for peace talks, with the Tehran regime demanding an end to the war on all fronts and the lifting of sanctions on the country, Iran’s semi-official Tasnim news agency said, citing an informed source.
But Trump said in a Truth Social post Sunday night that he did not like Iran’s response, adding that it was “TOTALLY UNACCEPTABLE!”
Meanwhile, Israeli Prime Minister Benjamin Netanyahu said Sunday that the war with Iran was “not over,” as the U.S. and Israel still aim to curb Tehran’s nuclear ambitions.
The slide in defense names also comes after Russia’s president Vladimir Putin said a conclusion to the four-year war in Ukraine could be in sight.
Speaking after a dramatically scaled-back annual Victory Day military parade in Moscow, Putin said the conflict, which he referred to as a “special military operation”, is “coming to an end.” However, Ukraine’s military reported Russian drone strikes over the weekend, in an apparent violation of a two-day ceasefire agreed earlier between the two sides.
Oil futures climbed and U.S. futures were lower in overnight trading following the latest developments.
Trump’s trip to China later this week is also in focus, with the president set for talks with Chinese premier Xi Jinping on a wide range of matters, from trade to rare earth export controls, as well as global geopolitics.
The global economy faces renewed tests as the war in the Middle East threatens to disrupt growth and disinflation.
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- Event Date: 2026-05-04
- Event Time (Optional): 14:00
After withstanding higher trade barriers and elevated uncertainty last year, global activity now faces a major test from the outbreak of war in the Middle East. Assuming that the conflict remains limited in duration and scope, global growth is projected to slow to 3.1 percent in 2026 and 3.2 percent in 2027. Global headline inflation is projected to rise modestly in 2026 before resuming its decline in 2027. Slowdown in growth and increase in inflation are expected to be particularly pronounced in emerging market and developing economies.
Downside risks dominate the outlook. A longer or broader conflict, worsening geopolitical fragmentation, a reassessment of expectations surrounding artificial‑intelligence‑driven productivity, or renewed trade tensions could significantly weaken growth and destabilize financial markets. Elevated public debt and eroding institutional credibility further heighten vulnerabilities. At the same time, activity could be lifted if productivity gains from AI materialize more rapidly or trade tensions ease on a sustained basis.
Fostering adaptability, maintaining credible policy frameworks, and reinforcing international cooperation are essential to navigating the current shock while preparing for future disruptions in an increasingly uncertain global environment. As Chapter 2 shows, scaling up of defense spending prompted by a rise in geopolitical tensions could boost economic activity in the short term but also bring about inflationary pressures, weaken fiscal and external sustainability, and risk crowding out social spending, which could in turn ignite discontent and social unrest. As Chapter 3 demonstrates, where conflict erupts, acute macroeconomic trade-offs and scarring follow and last well beyond the immediate wartime shock.
The estimates and projections in the April 2026 World Economic Outlook Chapter 1 and Statistical Appendix are based on statistical information available through April 1, 2026, but may not reflect the latest published data in all cases.
