$412M Floods Into Bitcoin ETFs as Missiles Fly Over the Middle East
Digital Asset Market: US spot Bitcoin ETFs experienced a strong six-day inflow streak, adding $412 million on Monday and reaching a total cumulative inflow of $46.04 billion, despite the escalating conflict between Israel and Iran. BlackRock’s iShares Bitcoin Trust led with a $266.60 million net inflow, while Fidelity’s FBTC and Grayscale’s GBTC followed, though GBTC continues to show net outflows. Trading volume was also robust at $3.12 billion on Monday. Analysts note that steady inflows indicate institutional confidence in Bitcoin’s resilience and its role as a hedge even amid geopolitical volatility. Although a sudden Israeli strike on Iran caused Bitcoin prices to drop by over 7 percent, underlying market data suggests this selling could represent a local bottom, with potential for recovery if Bitcoin holds key support levels. The market is again testing this support of $104,000.
Macro Economics: Oil prices rose about three percent to around $74 a barrel after President Trump dismissed the likelihood of a quick truce between Israel and Iran, fueling concerns over potential crude supply disruptions in the Middle East. Market volatility hit a three-year high as investors worried about risks to energy flows, especially through the crucial Strait of Hormuz, although Iran’s export infrastructure remains intact so far. Incidents like tanker collisions and navigation signal interference have contributed to the sense of instability, leading to increased hedging and trading activity. Analysts noted that while there is some hope for de-escalation, the situation remains unpredictable, with Morgan Stanley raising its oil price forecasts due to the heightened risk from the ongoing conflict.
Equities: US stocks slipped Tuesday as hopes faded for a quick resolution in the Israel-Iran conflict, following President Trump’s rejection of a ceasefire and calls for evacuating Iran’s capital, escalating market fears of a broader war. The Dow, S&P 500, and Nasdaq all fell, while oil prices surged nearly 3 percent in response to rising geopolitical tensions. Investors are also wary about Trump’s trade policies, with US officials seeking new deals at the G7 summit and announcing a US-UK pact. Meanwhile, disappointing US retail sales added to concerns, ahead of a key Federal Reserve meeting where rates are expected to remain steady amid questions about the prospects for cuts in 2025. Meanwhile, solar stocks tumbled after Senate Republicans moved to phase out clean energy tax credits, highlighting further political and economic uncertainty.
Also important to note is that the US industrial production declined by 0.2% in May, marking its second drop in three months and coming in weaker than expected despite an upward revision to April's figures. This pullback reduced the year-over-year growth in production to just 0.6%. Notably, although auto retail sales fell, auto production actually increased in May, while the energy and computer sectors saw declines. Capacity utilization also slipped for the third consecutive month, reaching 77.4%. These figures raise questions about whether this marks a turning point downward in hard economic data, especially as softer indicators have recently shown improvement.
The Fed and US Treasury: A prolonged conflict between Israel and Iran could prompt the Federal Reserve to cut interest rates sooner than expected if sustained higher oil prices weaken economic growth and the labor market more than they boost inflation. While the Fed often overlooks temporary oil-driven inflation, experts like Oxford Economics' Ryan Sweet argue that with the economy already slowing, a lasting oil price surge would be more damaging to growth and jobs. However, if conflict in the region causes oil prices to spike sharply and persistently, especially if the Strait of Hormuz is disrupted, inflation could rise significantly, potentially delaying rate cuts. For now, the Fed is expected to remain cautious, but an extended oil shock could force it to reconsider its rate-cutting timeline depending on the balance between inflation and economic slowdown.
Geopolitical: U.S. direct involvement in the Israel-Iran conflict appears increasingly likely. Israel may require American assistance to target certain nuclear facilities that are built deep within mountains. Although President Trump pledged not to deploy U.S. troops in Middle Eastern conflicts, that promise now seems to be taking a back seat. At the 2025 G7 summit in Canada, U.S. President Donald Trump left early, citing urgent developments in the escalating conflict between Israel and Iran, and called on civilians to evacuate Tehran. G7 leaders issued a unified statement supporting Israel’s right to defend itself and condemned Iran as a source of regional instability while opposing any possibility of an Iranian nuclear weapon and urging de-escalation in the Middle East, including Gaza. The summit took place amid ongoing missile exchanges between Israel and Iran and diverging international responses, with China criticizing Israel and offering to mediate. Trump’s summit agenda also included tough trade negotiations and a finalized U.S.-UK trade deal, while he signaled reluctance to increase sanctions on Russia and questioned past decisions to expel Russia from the G8.
Meanwhile, Putin takes advantage of the attention shift, and Russia launched one of its largest and most sustained attacks on Kyiv in recent months, killing at least 15 people and wounding more than one hundred in a ten-hour assault involving drones and missiles. Residential areas, including a nine-story apartment building in Solomyanskyi district, were heavily hit, resulting in significant destruction and ongoing fires across multiple districts in the Ukrainian capital. Emergency services continue searching the rubble for survivors as city officials report the number of casualties may still rise, with thirty apartments destroyed in a single residential block. Ukrainian officials suggest the timing of this "massive and brutal strike" was intended as a message to the United States, coinciding pointedly with major international attention elsewhere.
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Market Positioning Signals Cautious Optimism
Recent ETF inflows and Bitcoin’s resilience in the face of geopolitical uncertainty suggest there may be room for upside, especially if the current situation stabilizes. Many investors are buying the dips and positioning themselves for the next move higher, seeing this as a fresh opportunity after missing the earlier rally. However, risks remain. If the Israel-Iran conflict worsens, downside pressure could intensify. We encourage readers to remain cautious, as the conflict is likely to persist longer than some expect.
Economic Weakness Strengthens the Case for Rate Cuts
While headlines are focused on the war, trade negotiations have largely been sidelined. One indicator that stood out this week is U.S. Industrial Capacity Utilization. The sharp rebound after the COVID slump was impressive, but the persistent decline since 2022 is harder to ignore. Tariffs have yet to deliver any measurable benefit. Although the latest 0.2 percent month-over-month decline may seem small, it adds to a broader weakening trend. This slippage gives Chair Powell another data point as he considers the case for cutting rates. The economy, macro environment, and geopolitical backdrop are all deteriorating at an accelerating pace. Inflation linked to tariff policy has yet to emerge, while other shocks continue to push key indicators lower. It is becoming increasingly difficult for the Fed to justify holding rates steady. Over the longer term, we continue to expect inflation in the U.S. dollar, driven primarily by growing budget deficits and unchecked fiscal spending. This pattern is now deeply embedded in the system and falls outside the Fed’s control. With Washington showing little appetite for fiscal restraint, the central bank is left reacting to consequences it cannot prevent.
Trump's Foreign Policy Dilemma and Domestic Tradeoffs
On the political front, there is growing concern that President Trump may not follow through on his campaign promise to avoid further U.S. military involvement in the Middle East. That scenario now appears increasingly likely. Should it unfold, it would introduce a new layer of geopolitical risk into an already fragile global climate, with significant implications for market sentiment. A hot war in the region would likely stall Trump's domestic agenda, fracturing the coalition he has built around budgetary restraint optics, immigration enforcement, and protectionist economic policies. His political capital has limits, and any large-scale military engagement would likely become the central focus. The legacy of the Global War on Terror still lingers, and public support for another prolonged conflict remains weak. In our view, a pivot toward war and troop deployments would consume the administration’s bandwidth. One encouraging note is that the GENIUS Act is well along in the process and should remain unaffected by these developments.
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