June 16 – Stock futures posted a recovery bounce overnight as the conflict between Iran and Israel has not yet spread into a regional conflict as many investors feared when they went home on Friday. Lost in all of the rising geopolitical tensions of the past week is the fact that the Federal Open Market Committee will meet Tuesday and Wednesday this week to discuss monetary policy, giving its update on Wednesday afternoon. The VIX cautiously dipped back below 20 this morning as fears eased a bit, while the dollar index traded near 97.9. Yields on 10-year Treasuries are trading near 4.43%, while yields on 2-year Treasuries are trading near 3.96%. Crude oil prices are nearly 2% lower this morning, while the grain and oilseed sector is mixed, with the grains slipping lower and the oilseeds continuing to find support from Friday’s announced biofuel blending mandates released by the EPA.
Iran and Israel continued to trade strikes through the weekend, with Israel focused primarily on strategic military and nuclear targets, along with a few energy infrastructure targets, while Iran’s strikes appeared to be more focused on civilian targets. Israel has largely neutralized Iran’s air capabilities, giving it the ability to fly over Iran pretty much wherever it wishes without concern of encountering Iranian aircraft. It has also disabled much of Iran’s anti-aircraft capabilities. For its part, Iran has been sending waves of missiles and drones toward Israel, including intercontinental ballistic missiles, seeking to overwhelm Israel’s defense system. That has been working to some extent, with some reports suggesting that 20% of the missiles are getting through defenses to hit civilian targets.
Israel reportedly hit a fuel depot near Tehran as a warning to Iran that it could focus its attacks on Iran’s energy infrastructure if it continues to target civilians in Israel. There are reports that it also hit the South Pars gas field, shutting down natural gas supplies used domestically, including for the production of urea fertilizer. That raised fears that Iran might target energy infrastructure in other regional countries, particularly since Jordon and Saudi Arabia were also reportedly helping Israel to take out Iranian missiles crossing their airspace. There were also concerns that Iran might shut down the Strait of Hormuz, through which a fifth of the world’s oil supplies travel. There continue to be fears that Iran’s proxy groups might mount counter offensives as well. Yet, none of that has occurred to this point, suggesting that Iran lacks the will or the capability to do so at this point, and the proxy groups are much weaker due to previous Israeli offensive actions. As such, crude oil prices took back some of Friday’s risk premium in overnight trade, while buyers returned to the equity markets. Israel remains determined to end Iran’s nuclear program, which would likely require that the current offensive continue for at least several more weeks. President Trump encouraged Iran to return to the negotiating table, but thus far it has shown little desire to do so.
The Federal Reserve meets the next two days to discuss monetary policy, with the Middle East conflict adding to the uncertainty. We’re in the final third of the 90-day window for the reciprocal tariff rollback, with the markets feeling increasingly comfortable with the status quo for now. However, that uncertainty may ratchet up again as we approach the end of the 90-day period, suggesting that the Fed will continue to be reluctant to cut rates at this meeting or at the next meeting. Inflation numbers continue to favor rate cuts, but the Fed remains apprehensive about the longer-term inflationary risks of the tariffs. Inflation numbers overall have been helped by declining energy prices, but energy prices are turning higher now as the Middle East tensions rise. Those factors will continue to leave the Fed reluctant to cut rates until / unless it sees a notable increase in the unemployment rate. That may happen, as we’re seeing signs of softening in the jobs sector, but the numbers haven’t changed enough yet to justify a rate cut amid the uncertainties of tariffs, energy prices, etc.
The U.S. Environmental Protection Agency removed one of three pieces of uncertainty in the nation’s biofuel program on Friday. We still do not know the extent of the Small Refinery Exemptions that will be granted, nor do we know the final fate of the 45Z funding mechanism for the biofuel program. We should have greater clarity on both of those in the weeks ahead. But we now know more about the blending mandates. The EPA changed its mandates from gallons-based to RINs-based, leaving the conventional fuel blending rate (ethanol) pretty much unchanged. Biomass-based diesel went from 5.36 billion RINs in 2025 to 7.12 billion RINS for fiscal 2026 that starts October 1. The 5.36 billion RINs for the current year translate to roughly 3.35 billion gallons. One of the new changes is to cut the value of RINs generated from biofuel produced with foreign feedstock in half. Using the same mix of foreign and domestic feedstocks in fiscal 2026 would suggest a mandate of 5.61 billion gallons. However, there’s a risk that this could change the cash trade of these oils, with domestic oils flowing into fuel production to capture the RINS, while imported oils flow into the domestic food sector. Reaching the 7.12 billion RINS with domestic feedstock only would translate into something closer to 4.61 billion gallons. Nonetheless, that still supports strong cash soyoil demand.
