Markets in a Minute – June: Markets Stay Resilient Amid Global Tensions
Geopolitical tensions escalated in June, as further conflict in the Middle East, between Iran and Israel, added to global uncertainty. Markets appeared to look through the turmoil, with some indices reaching all-time highs before month-end. The conflict caused a spike in oil prices (primarily through a potential supply constraint from the closure of the Strait of Hormuz – a key supply route), before it subsided, leaving oil prices down c.10% from the start of the year. This is a helpful deflationary force, particularly in Europe, and is further reason to think the European Central Bank’s (ECB) interest rate policy will be flat or down, not back up. The broader macroeconomic picture for the UK remains mixed. While it was the fastest growing economy in the G7 in the first quarter of 2025, growth was only up by 0.7%. Business confidence has been affected by recent tax hikes and unemployment is now at a four-year high. Looking forward, the outcome of trade talks, and any agreement on a global tariff framework, could shape the direction of travel for investment markets.
UK economic picture remains mixed, despite positive near-term figures
- The UK’s final estimate for Q1 gross domestic product (GDP) data confirmed the strong to start to 2025 with output having grown by 0.7%. But this could be temporary as the economy is experiencing weakening real income growth, tightened fiscal policy, and households feeling the lagged effects of past interest rate rises.
- The Bank of England (BoE) voted 6-3 in favour of maintaining interest rates at 4.25%, as expected, citing persistent inflationary pressures and elevated global uncertainty. BoE Governor Andrew Bailey said, “interest rates remain on a gradual downward path,” while suggesting the central bank would take a careful approach to further cuts in light of incoming data.
- Inflation, as measured by the consumer prices index (CPI) increased 3.4% year-on-year (yoy) in May, down from April’s 3.5%. Importantly, services inflation slowed from 5.4% in April to 4.7%, which matched the BoE’s forecast.
- Government borrowing reached £17.7bn in May, £0.7bn more than in the same month last year. The pickup reflects increased public sector investment coming online. The current budget deficit and debt interest payments were both reduced slightly compared to May 2024.
US Federal Reserve holds rates again, as inflation expectations continue to shift
- The Federal Reserve (Fed) maintained interest rates at the 4.25% to 4.5% range, as expected, marking the fourth consecutive hold by the central bank. Fed Chair Jerome Powell noted at the press conference that “despite elevated uncertainty, the economy is in a solid position,” and the Fed remains “well positioned to respond in a timely way to potential economic developments.”
- US inflation increased slightly to 2.3% yoy in May, according to the personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation. Core PCE – which excludes the more volatile food and energy components – increased 0.2% month-on-month and 2.7% yoy in May, up from April’s readings of 0.1% and 2.6%, respectively.
- US consumer expectations for inflation in the year ahead significantly dropped from 6.6% in May to 5% in June, according to the University of Michigan’s final index of consumer sentiment for June. After showing spiking concerns over the inflation outlook in recent months, tariff impact fears have somewhat softened. The overall index jumped to 60.7, up 16% from May.
Trade tensions escalate between many US trading partners, particularly Japan
- The US and Japan failed to reach an agreement on tariffs at the G7 summit, which surprised economists. The negotiations are yet to be concluded, but the end of the tariff pause could see levies on Japanese imports increase to 24% from 10%.
- The Bank of Japan (BoJ) left its policy rate unchanged at 0.5% at its 16–17 June meeting, as expected, and signalled it would slow the pace at which it tapers its purchases of Japanese government bonds from April 2026.
- Japan’s core CPI inflation increased 3.7% yoy in May, ahead of a consensus forecast of 3.6% and April’s 3.5% increase. The primary driver of the increase was non-fresh food, driven by surging rice prices.
Equity markets remained strong throughout June, with global stock indices climbing despite ongoing geopolitical tensions and trade uncertainty. Investor appetite for risk assets continued, supported by falling interest rates in the eurozone and excitement around technology innovation, particularly artificial intelligence, in the US. However, the US equity rally is showing signs of fatigue as high valuations and sharp movements in the US dollar have weighed on returns, particularly for UK investors, where a weaker dollar reduced the impact of overseas performance.
Bond markets were also active in June, as yields adjusted to shifting interest rate expectations. UK and US government bond yields moved higher, offering better income opportunities for investors, although capital values remained under pressure. Of note was global inflation data and the disparity between the interest rate projections from central banks, which caused sizeable currency movements. Bonds priced in sterling performed well, while those linked to the US dollar lagged as the currency weakened against its peers, raising doubts about the status of US Treasuries as a global safe haven. Fixed income market volatility has proven a rich hunting ground for active bond managers in recent years, and June was no different, with ample opportunities for active fund selections to deliver robust positive returns.
In conclusion
While headlines around conflict, inflation, and trade tensions can create short-term noise, markets continue to demonstrate resilience, and active opportunities remain across asset classes. Staying invested through periods of uncertainty remains key to long-term success. If you have any questions about how current market events may affect your portfolio, or if you’d like to discuss your financial plan in more detail, please don’t hesitate to get in touch with us.