Local equities face renewed downward pressure as resurfacing geopolitical friction in the Middle East and prospects of further domestic monetary tightening threaten to derail a recent market rally.

Investor sentiment is turning bearish following the postponement of peace negotiations between the United States (US) and Iran, a development that has reignited tensions between the two nations. The sudden friction interrupts a brief period of market optimism that followed an initial memorandum of understanding aimed at securing a permanent peace deal and reopening the critical Strait of Hormuz shipping lane.

“The local market had a good run last week driven by optimism towards the interim deal between the US and Iran,” said Japhet Tantiangco, research manager at Philstocks Financial Inc. “Significant downside risks against a sustainable rally remain however. Hence, investors are advised to maintain caution.”

The domestic macroeconomic landscape is compounding the geopolitical anxiety. Market participants are bracing for further monetary tightening by the Bangko Sentral ng Pilipinas (BSP). Following an interest rate hike that brought the overnight reverse repurchase rate to 4.75 percent, the central bank signaled that additional increases remain on the table to firmly anchor inflation back within its target range.

The trajectory of the local currency and fixed-income market will also dictate the equity market's direction. While a stronger peso and declining long-term local treasury yields provided a recent buffer for stocks, any sudden reversal in these trends is expected to weigh heavily on local share prices.

Despite the cautious backdrop, some market observers see a floor for the benchmark Philippine Stock Exchange Index (PSEi). Online brokerage 2TradeAsia.com indicates that if the US-Iran ceasefire ultimately holds, investors may move back into the market with firmer conviction. Lower energy costs and a defensive, less volatile central bank stance could release sidelined capital back into cyclical sectors, supporting a baseline of 6,000 for the index.

“The combination of easing energy costs and defensive-but-no-longer-panicking monetary policy calls for some releasing in capital, especially in cyclicals, supporting the case for 6,000 as a base,” the brokerage said.

However, upside targets for the PSEi face a hard ceiling near the major resistance level of 6,600. Market liquidity is expected to be constrained in the second half of the year by a concentration of major capital-raising events, most notably the anticipated initial public offering of fintech giant Mynt, which is expected to raise the equivalent of ₱60 billion. This massive pipeline is poised to absorb finite secondary market capital, capping broader index gains.

“What is likely to keep the PSEi from breaking through its next major resistance is the concentration of liquidity events in the second semester, including the initial public offering of Mynt, which will continuously cap broader index upside by absorbing finite secondary market capital,” 2TradeAsia.com added.

Beyond domestic liquidity, global fund managers are also looking outward, awaiting US gross domestic product data to gauge international equity appetite.