The US enters the fray

• Equity markets added 0.8% to 1% in sterling terms, except for the UK and Europe
• Brent crude advanced 3.7% during a volatile week, in dollar terms

• Gold slipped 1.9% in dollar terms but remains near all-time highs
• UK and European equities both fell 0.8% in sterling terms

US military strikes on Iran’s nuclear sites in support of Israel have provoked alarm. World leaders are scrambling to respond and offer a diplomatic resolution to the conflict. Last week it was still viewed as a regional problem - oil prices were up +3.7% over the week and shipping insurance costs had spiked for journeys into the Gulf (and particularly Israel). This still holds but a sustained blockade of the Strait of Hormuz could worsen the situation as some 20 million barrels of oil pass through the channel each day.

At the time of writing, the market reaction is muted. Oil prices retraced much of their spike when European markets opened; moves in developed market equity indices and safe-haven assets like the US dollar, gold and US Treasuries are unremarkable. We do not currently see this escalation posing systemic risks to global investment markets.

Yet a diplomatic resolution now appears more distant and Iran is unlikely to negotiate under Israeli or American bombardment. Israeli Prime Minister Netanyahu is thankful for the US’s intervention. But some US lawmakers have questioned President Trump’s authority to act without congressional consent. Trump risks alienating some supporters who don’t want the US embroiled in faraway conflicts. The US’s intervention poses significant questions for rules-based international affairs.

United States: The US Federal Reserve held rates at 4.25 to 4.5% last week despite a rise in unemployment approaching 4.5% and personal consumption expenditure inflation increasing to 3%. Projections suggested the US economy may grow by around 1.4% in 2025, significantly weaker than 3% last year. The likelihood of two 0.25% cuts this year is reducing. President Trump called for a 2% cut and mused that he may appoint himself Fed Chair.

United Kingdom: The Monetary Policy Committee held rates at 4.25% last week after cutting by 0.25% in May. Bank of England governor Andrew Bailey said interest rates remain on a downward slope and cuts are possible from August, especially if the job market continues to weaken (there’s no MPC meeting in July).

Japan: The Bank of Japan unanimously decided to keep rates at 0.5%. The bank wants to reassure investors after weak demand for its 30-year bonds in May sent yields to record highs nearing 3.2%. Investors fear that consumer price inflation rising at 3.4% in the year to April will erode their value. The BOJ will also taper its bond-buying program by ¥200bn per month.

Swiss National Bank: The bank cut interest rates by 0.25% to 0%. Inflation in Switzerland fell below 0% in May, caused by a surging Swiss franc on safe-haven buying caused by President Donald Trump’s trade war. A roughly 10% appreciation of the Swiss franc against the dollar this year has caused import prices to plummet and dragged down inflation.

The US Senate passed a stablecoin bill called the GENIUS Act by a 68-30 margin. The bill offers a regulatory framework for the fast-growing stablecoin sector. Stablecoins are a type of cryptocurrency attempting to maintain a stable value by being pegged to a reserve asset like the dollar or gold. Proponents say they may offer faster, cheaper and potentially more secure transactions by leveraging blockchain technology. Walmart and Amazon are among major retailers exploring their use to streamline payments, The Wall Street Journal reported last week. Corporate-issued stablecoins may disrupt traditional banking and significantly reshape the future of global retail payments. However, critics believe stablecoins won’t easily disintermediate incumbent card payment companies.

• Germany’s ZEW economic sentiment index surged 3 points to 47.5 in June - well above an expected 35 – signaling rising confidence that may mark the end of Germany’s stagflation
• S&P Global affirmed Germany’s AAA/A-1+ rating with a stable outlook, citing its balance sheet strength, economic diversification and high wealth levels supporting creditworthiness
• The EU Commission has drafted legislation to outsource climate efforts to poorer nations, targeting a 90% emissions cut from 1990 levels by 2040. A final proposal is due on July 2
• US solar stocks plummeted after the US Senate upheld cuts to renewable energy incentives in Trump’s spending bill, which will phase out renewable energy tax credits by 2028 
• Japan’s Nippon Steel completed its $14.9bn acquisition of US Steel, making concessions to address Trump’s national security concerns - including $11bn in investment by 2028 and granting the US government a ‘golden share’
• Shipping insurance costs in the Middle East surged over 60% amid escalating regional tensions, with premiums rising from 0.125% to 0.2% of ship value for Gulf bound sailings
• G7 leaders met in Alberta, with six joint statements on Ukraine, AI, quantum tech, critical minerals and wildfire resilience. Despite President Trump’s early departure, the summit saw the signing of a new UK-US trade deal

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