Markets are moving through one of their most complex macro environments in recent memory where geopolitical flashpoints, central bank ambiguity, and evolving currency regimes collide. Yet according to UBS analysts, the instinctive market response to overprice geopolitical shocks may again be in play.
UBS, which has a long history of mapping market psychology, reminded investors on Monday that markets “most of the time initially overreact to political events,” citing examples from Brexit to Tiananmen Square. The firm believes the current Israel-Iran conflict is “very far removed” from historical oil crises like Iraq’s 1990 Kuwait invasion. Despite reports of three tankers on fire near the Strait of Hormuz, UBS downplays the oil supply threat—Iran’s 1.7 million barrels per day represent only ~1.6% of global supply, and OPEC’s 6 million bpd of spare capacity provides a backstop.
Nonetheless, safe-haven demand has climbed. Gold prices advanced during Asian trading Tuesday as traders digested news of Israel striking Iranian state TV and Iran preparing what it claims will be its most extensive missile barrage to date. At the same time, UBS reiterated its bullish outlook on gold, maintaining a year-end 2025 price target of $3,500/oz and overweight stance on both gold and defense stocks. “Defense is secular ‘non-cyclical’ growth,” the firm added, highlighting European exposure in particular.
Meanwhile, the U.S. Dollar continues to edge higher ahead of the two-day FOMC meeting, though momentum lacks conviction. While the Fed is widely expected to hold rates steady, focus will be on whether policymakers signal one or two cuts later this year. Growing market bets on a September cut contrast with sticky wage growth and concerns that Trump’s tariffs may stoke consumer prices again.
BCA Research, which remains long-term bearish on the dollar, has turned tactically bullish, urging investors to reopen long positions in the Dollar Index and short the British pound, now seen as overbought. Their base case: short-term technicals trump longer-term structural headwinds in today’s tactical environment.
At the same time, Wells Fargo analysts have flagged a tightening U.S. labor force, driven in part by immigration crackdowns. With foreign-born workers declining by 150,000 in recent months and legal channels restricted, wage resilience may persist possibly complicating the Fed’s path to easing.
In Asia, the Bank of Japan kept rates unchanged and signaled a slower drawdown of its massive balance sheet starting next fiscal year. The BOJ’s extended QT timeline is a nod to recent volatility in long-duration bond yields and the precariousness of Japan’s inflation outlook amid U.S. tariffs and oil price instability. One board member dissented, preferring a faster taper, reflecting growing internal tensions as the BOJ tiptoes away from ultra-loose policy.
Japanese equities and exporters remain vulnerable, especially after the Trump-Ishiba meeting failed to resolve trade frictions. Without a breakthrough on tariff elimination, Japan’s export-reliant economy faces renewed pressure.
Back in equity markets, UBS suggests “buying into weakness” as the current pullback remains mild and largely sentiment-driven. Their MSCI AC World “Bubble Scenario” sees 16% upside, supported by resilient consumption, AI productivity tailwinds, and policy easing.
Select stocks are already responding to shifting investor sentiment. Bausch Health (NYSE:BHC) has surged over 30% in June, riding a broader reassessment of sector opportunities amid a sideways-trading broader market.
Bottom line:
Markets may be overpricing geopolitical risk while underestimating the importance of policy signals, currency realignments, and sectoral rotation. For investors navigating this macro maze, tactical positioning especially in the dollar, gold, and defense equities—offers a more agile path forward than passive strategies.
