The cost of commitment

• US equities, which rose +3.5% in local currency terms - although this reduced to a +1.7% return for sterling investors
• Asian and emerging market equities, with Japanese, Asia ex-Japan and emerging market indices up +2.9%, +2.2% and +2.5% respectively in local currency terms

• Commodities, with gold declining -2.8% in dollar terms and the oil price falling heavily after the prior week’s spike
• The US dollar, which fell -1.9% against sterling

Following the US’s decision to directly enter the Israel-Iran conflict a little over a week ago, President Donald Trump quickly sought to broker a ceasefire agreement after claiming that US strikes had severely damaged key nuclear sites within Iran. A tentative ceasefire held from 25 June, with Trump labelling the conflict the “12 Day War”. Having risen the previous week, the price of Brent Crude Oil declined -12% in dollar terms last week, while global equity markets continued to rally. All parties have sought to present the outcome of the recent hostilities as a victory, but the path to further de-escalation is unclear. Iran denied it is due to return to the negotiating table regarding its nuclear programme after Trump had claimed talks were scheduled for this week.

Trump made the claim whilst attending a Nato summit in The Hague, at which he also reiterated the US’s commitment to collective defence – dismissing any lingering doubts. Perhaps the most significant takeaway from the summit, however, was a pledge amongst members to reach a 5% defence spending target within a decade. This is a significant leap from the current 2% guideline – even accounting for the fact that only 3.5% must account for “core” defence spending on troops and weaponry. For the UK Treasury, further future spending commitments are likely to add to already significant fiscal quandaries. The week also saw the government U-turn on proposed cuts to disability benefits to stave off a rebellion by backbench MPs, having already revised cuts to the winter fuel allowance. Given the chancellor’s “non-negotiable” borrowing rules, tax hikes come the next Autumn budget appear an ever-increasing possibility.

Sterling strengthened to a 3-and-a-half-year high above 1.37 against the dollar. The US currency has been weakening against many peers this year, with the dollar index (DXY), which measures the greenback against a basket of currencies, off over -10% year-to-date. It’s likely that the dollar is moving back to pre-pandemic levels. In response to Covid-19, the US spent some $6 trillion stimulating its economy. This sugar-rush bid-up the dollar and US assets, notably AI-related tech companies. Extreme levels of retail equity ownership in the US have supported this trend. At nearly 30% of total household assets, ownership has surpassed dot.com highs in 2000. In the short-run, interest rate differentials matter to currencies’ relative valuations. In the long-run, structural issues including fiscal policy and debt sustainability come to the fore. The official line of President Trump’s team is to want a "strong" dollar, yet further weakening is possible as the post-pandemic tailwind continues to fade. However, any talk of the demise of the dollar is overdone.

The Office for National Statistics (ONS) – the official statistics agency in the UK – suffers from “deep seated” issues which must be urgently addressed before the body can “re-build its reputation”, according to a critical independent investigation into its effectiveness. The data produced by the ONS is heavily relied upon by key policy makers. The Bank of England and other observers have long held doubts over the reliability of ONS jobs market data, which is a key input in monetary policy decision making. The ONS "fully acknowledged" the issues highlighted in the report.

• US Banks will face fewer restrictions after the Federal Reserve eased a key capital rule last week. The changes will reduce capital requirements (a key leverage ratio) from 5% to a range of 3.5% - 4.5%. This will allow banks to use more of their reserves and provide further liquidity to the Treasury market
• Tech giant, Nvidia, became the world’s most valuable company last week, overtaking Microsoft after renewed optimism in what the Chief Executive Jensen Huang called a “multi-trillion opportunity” in AI and Robotics
• Rice prices have more than doubled from this time last year in Japan despite the Government releasing emergency stockpiles in an effort to drive down prices
• Oman will become the first Gulf state to introduce a personal income tax as they look to diversify their revenue sources from 2028
• A final data revision showed the US economy contracted by more than previously thought in the first quarter of 2025, with GDP falling by -0.5%. A surge in imports largely contributed to the fall ahead of anticipated trade tariffs
• A significant rise in demand for transportation equipment, namely non-defence aircraft and parts, saw US durable goods orders rise by +16.4% over May, marking the largest rise in over a decade
• The US and China reached an agreement to expedite rare-earth shipments to the States last week. The news led US and Asian equity indices higher
• Donald Trump labeled a Supreme Court ruling curbing judges’ power to block his orders a ”giant win”. The US administration will hope this leads to a meaningful reduction in injunctions against the president’s agenda

Disclaimer

Past performance is not a reliable indicator of future returns. Nothing herein should be construed as a recommendation to hold, buy or sell any security or encourage any investment decision. The mention of any particular asset class, sub-asset class or company does not imply that it is held, or may ever be held, in any product or service.