CIO's Market Watch – June 2025

Reigniting the middle east conflict

It is too early to know what the outcome of the actions undertaken by Israel and the US in Iran will be. Depending on whose report you read, their nuclear capability is somewhere between destroyed and untouched. Inevitably, the truth will be somewhere between both, as it usually is.

In this conflict, given the reasons for it, political or moral debate is probably less to the fore than in other conflicts, but the effects can be far reaching in economic terms and for asset prices. In the short term, the oil price, unsurprisingly, spiked, then fell, which would have had limited impact. However, there can be little doubt that the action will have spurred western countries and NATO members to increase the amount they spend on defence, which in turn will impact on economic policy as it relates to taxation, borrowing and spending plans over the years and decades to come.

This is another step along the path of de-globalisation and countries looking more at themselves for certainty of security, supply of raw materials and energy.

Inflation remains sticky, economic growth is weak, what should central banks do?

Ever since inflation became an issue following the COVID induced supply chain problems and energy price increases following the Russian invasion of Ukraine, it has been a thorn in the side of central banks, such as the Bank of England. In nearly all major economies they are charged with meeting inflation targets, and they have been unable to do so, in most cases, other than fleetingly, since then.

Therefore, interest rates have not fallen very far as they are the best, albeit blunt, tool available to beat inflation. This is not an ideal situation as higher interest rates will also dampen economic growth. Indeed, in June, the World Bank significantly reduced its expectation for global growth for 2025 to 2.3%, previously 2.7%, compared to 2.8% in 2024. A major reason for it being a slowdown in the US, the world’s largest economy, which it thinks will grow by 1.4% in 2025, half what it did in 2024, is mainly due to the trade tariffs that are being introduced. This has left the US Federal Reserve Bank (FED) in a difficult spot; cut interest rates to stimulate growth, which would fuel inflation or keep rates higher and risk the opposite. The FED is independent and in June resisted the President’s rather outlandish calls for significant cuts in interest rates. They are likely to move this year, but not in a dramatic fashion.

In the UK, it’s a similar problem, although economic growth is weak with few positive signs, so the Bank of England could be more aggressive. Meanwhile, the European Central Bank has been much more pro-active, as inflation was less of an issue and they are probably near the stage of having taken enough action for now.

The debate over whether to cut or not to cut is live and not going away.

Plenty to see in bonds, equities, currencies and commodities.

Unsurprisingly, financial markets are bouncing around, which has been the tendency for some time now. 

In the world of commodities, gold is often considered to be a safe haven in times of stress or uncertainty. The price has been very strong since 2023, hitting all time highs. More recently the price has risen and fallen as investors have embraced riskier assets or otherwise. Unsurprisingly the oil price jumped when Iran was in the spotlight, but fell back quickly as investors believed the air strikes had subsided and the Straits of Hormuz would remain open. However, the price remains very important in the fight against inflation, more strength means more inflation.

Oil price; Brent Crude (USD), 1 year to 30.06.2025

Source: Bloomberg 10.06.2024 to 01.07.2025. The performance information presented on this page relates to the past. Past performance is not a reliable indicator of future returns.

There have been significant moves up and down in the bond market this year, with big differences within the asset class as well, as bonds that are more sensitive to interest rate moves (typically those with longer lives and those of poorer quality) moved more. June, however, was positive for most parts of the bond market. 

In equity markets, we reverted to a pattern seen many times, with the US performing well, driven by a resurgence in the share prices of the large technology companies, particularly those involved in the growth of Artificial Intelligence (AI). Japan and emerging markets were also strong, whilst Europe was slightly lower.

Overall, though, given the turbulent times we live in, the valuation of markets and the difficult economic conditions, financial markets, particularly equities, have done, in my view, remarkably well.

This is not a problem that is easily resolved.

What’s coming up?

As usual, plenty to keep us occupied. By the time you read this, it is likely that President Trump’s “Big, beautiful Bill”, will have been through the Senate and probably just squeezed an approval. The focus will then be on the potential impact of the changes to tax and the need for the US government to issue large amounts of debt as a result, with their own debt ceiling being at risk of being hit. However, it’s probable that a way will be found round the problem.

We are also approaching the end of the 90 day pause on US tariffs on 9 July. As I write this, there is just speculation as to what the outcome might be, but stories in the press suggest that big, comprehensive, lasting deals are unlikely. That is hardly surprising, remember how long Brexit took? The imposition of US tariffs has been scattergun, causing severe disruption to government and business planning and decision making, that looks set to continue, meaning more uncertainty for markets over the summer.