June Market Review: Markets Refocus as Geopolitical Tensions Ease
Global markets navigated a volatile, but ultimately constructive, June as geopolitical tensions in the Middle East eased following a tentative agreement between the US and Iran. The reopening of the Strait of Hormuz, and the subsequent decline in oil prices, helped reduce inflation concerns, allowing investors to refocus on economic fundamentals, corporate earnings and monetary policy. While central banks maintained a cautious stance and economic data remained mixed, continued investment in artificial intelligence (AI) and digital infrastructure supported longer-term optimism, although elevated valuations prompted increased volatility and broader market rotation.
Geopolitical tensions ease as markets refocus on fundamentals
- A Memorandum of Understanding was signed between the US and Iran in June. The 14-paragraph agreement is believed to include a pledge that Iran will never have a nuclear weapon and establishes a $300bn fund for the “reconstruction and economic development” of the country.
- Risk appetite improved significantly afterwards, with market participants increasingly pricing in a lower probability of further escalation. Oil moved sharply lower as concerns over supply disruption and the potential closure of the Strait of Hormuz diminished, reducing pressure on global inflation expectations. Falling energy prices supported both equity and bond markets with investors becoming more confident that major central banks could continue easing monetary policy if inflation remains contained.
- Investor optimism surrounding artificial intelligence, digital infrastructure and semiconductor demand continued to provide support for technology-related sectors.
UK Political uncertainty fails to derail improving inflation backdrop
- Political uncertainty increased after Sir Keir Starmer announced his resignation as Prime Minister, with the Labour Party beginning the process of selecting a new leader.
- The Bank of England left interest rates unchanged at 3.75%, acknowledging uncertainty surrounding the potential inflationary effects of developments in the Middle East.
- UK inflation – as measured by the Consumer Prices Index (CPI) – remained at 2.8% year-on-year in May, according to the Office for National Statistics, unchanged from April and the lowest reading since March 2025.
- Services inflation continued to moderate, particularly within housing-related categories, although transport inflation accelerated due to higher fuel prices and airfares.
Resilient US economy keeps interest rate expectations elevated
- US inflation remained sticky in May. The Bureau of Economic Analysis reported headline Personal Consumption Expenditures (PCE) inflation rose to 4.1% year-on-year. Meanwhile, core PCE increased to 3.4%, reinforcing expectations that the Federal Reserve (Fed) will keep interest rates higher for longer.
- Producer prices increased 6.5% year-on-year, reflecting higher energy and input costs earlier in the month. However, easing oil prices over recent days may help reduce some of these pressures moving forward.
- The US trade in goods deficit jumped by $22.7bn in May to $105.8bn, according to the Census Bureau, up from $83.0bn. The data shows that US goods exports fell by $11.8bn in May, to $207.7bn, including a fall in exports of ‘foods, feeds, & beverages’ and automobiles. Imports increased $10.9bn to $313.4bn in the month, led by higher shipments of capital goods – which could include equipment to build America’s AI data-centre rollout.
- The Fed left interest rates unchanged at 3.50%-3.75%, although updated projections indicated policymakers remain cautious on inflation.
Japan extends leadership as reform momentum continues
- Japan also unveiled a long-term fiscal investment plan worth around ¥370 trillion, targeting strategic sectors including AI and semiconductors to strengthen economic growth and industrial competitiveness.
- The Bank of Japan increased its policy rate by 25 basis points to 1.0%, taking borrowing costs to their highest level since 1995 and continuing the gradual normalisation of monetary policy. Policymakers also reduced government bond purchases, reinforcing the shift away from the ultra-accommodative policies that characterised the previous decade.
- Bank of Japan Governor, Kazuo Ueda, signalled that policymakers remain alert to inflation risks and could consider further policy tightening if price pressures remain elevated.
- Japan’s exports increased 17.0% year-on-year in May, supported by strong demand for technology components, automobiles and industrial goods.
Overall
Global equity markets were broadly unchanged over the month as strong gains in Europe, Japan and US smaller companies offset some selling pressure in the largest global technology stocks. Investors rotated away from highly valued AI beneficiaries following an exceptional first half of the year. Meanwhile, continued optimism surrounding AI infrastructure and semiconductor demand remained supportive of the longer-term investment case. European equities benefited from easing energy prices, whilst Japan extended its strong year-to-date performance on the back of improving corporate governance, earnings momentum and supportive domestic policy.
Government bond markets experienced a calmer month as easing geopolitical tensions and lower oil prices reduced concerns over further inflationary pressures. Despite the high US inflation reading, the ten-year US government bond yield was only slightly higher, ending the month at 4.47%, compared with 4.44% at the end of May. In the UK, despite political turbulence and concerns over higher borrowing under a Burnham administration, the ten-year government bond yield fell to 4.76%, down from 4.81% a month earlier.
In summary
Despite a month that began with heightened geopolitical uncertainty, global markets demonstrated resilience as investors quickly shifted their focus back to economic fundamentals, corporate earnings and the outlook for interest rates. While inflation remains an important consideration and market volatility is likely to continue as central banks carefully balance growth and price stability, the broader investment backdrop remains constructive. As always, attempting to predict short-term market movements can prove costly, and maintaining a well-diversified portfolio aligned to your long-term objectives remains the most effective approach.
If recent market developments have prompted any questions about your investments or financial plans, please speak to your Financial Advice Centre Ltd adviser, who will be happy to discuss your individual circumstances.
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