BEYOND THE MIDDLE EAST
Easing Middle East tensions soothed equity markets last week, with the potential for Fed easing and a US-China trade agreement also supportive. These topics and others were discussed in our Mid-Year Market Insights recording, which can be viewed via the link below.
The Middle East ceasefire has made regional tensions less front and centre. While developments will be closely watched for any flare up, economic data including ISM manufacturing survey (tomorrow) and June's employment report (Thursday) are set to be in focus this week. This, along with Chair Powell's comments tomorrow, should give more clarity of when the Fed is likely to lower rates.
A de-escalation of Middle East tensions between Israel and Iran, as well as a seemingly loosely agreed ceasefire, was sufficient to pull oil prices lower. Consensus thinking was that Iran was in a weak position and escalating tensions would not be worthwhile, all of which led Brent crude oil to fall by 12% last week to $67.8/barrel.
While there was some suggestion the Fed could cut rates over the summer, Chair Powell pushed back against this last week and said that the central bank would 'wait and see' how data evolves "before considering any adjustments to our policy stance."
Germany's draft budget revealed bigger spending plans than expected, with a budget deficit of 3.4% of GDP projected for 2025 and 3.7% in 2026, up from 1.2% in 2024. This is being driven by a substantial increase in defence spending. Relatedly, Nato's 32 members last week agreeing to spend 5% of GDP on defence by 2035.
Later in the week, a US-China agreement was signed on how to lower trade tensions between the two countries as outlined during May's meeting between officials in Geneva. US Commerce Secretary Howard Lutnick also said that trade agreements with 10 of America's major trading partners were imminent.
Global equities were supported by easing Middle East tensions, the potential for Fed rate cuts and constructive trade developments, with the S&P 500 rallying by 3.4% last week and reaching a new historical high while the Stoxx Europe 600 was 1.3% higher.
US Treasury bond yields fell (bond prices rise as yields fall) as falling oil prices reduced inflation expectations, potentially allowing the Fed to reduce its policy rate. There were also rumours that Trump could name his replacement for Chair Powell, whose term ends in May 2025, which was seen as raising the likelihood of lower rates going forward. The US Treasury 10-year yield was down by 10bps last week to 4.28%.
German yields faced upward pressure as improved business sentiment figures suggested that fiscal stimulus plans are having an impact and could lead to increased private investment and GDP growth. This backdrop means that there may be fewer rate cuts from the ECB, with 10-year German bund yields rising by 6bps last week to 2.58%.
- Mon 30th Germany - Retail sales
- Tue 1st US - ISM manufacturing, Job Openings and Labour Turnover Survey (JOLTS) • Germany - Labour-market data
- Wed 2nd Eurozone - Unemployment rate
- Thu 3rd US - Employment report, ISM services, initial jobless claims • Germany - GfK consumer confidence
- Fri 4th Germany - Manufacturing orders
This is intended as a general review of investment market conditions. It does not constitute investment advice and has not been prepared based on the financial needs or objectives of any particular person.