Investment Viewpoint: a truce causes a surge in equity markets

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Markets and macro insights with Bernard Swords, Chief Investment Officer

What happened in markets last week?

• Last week featured a strong showing for equity markets, with world equities up nearly 3% in local currency terms. A few key factors drove the surge. A truce between Israel and Iran caused a significant drop in the oil price (13% over the week), prompting investors to increase risk profiles. In addition, there were rising expectations of interest rate cuts in the US in the near term: two Federal Reserve governors stated that a July cut is possible.

• According to US Commerce Secretary Howard Lutnick, trade negotiations (to prevent the imposition of high tariffs) are going smoothly. Lastly, an easing of banking regulations in the US strengthened financial returns.

How have markets been performing?

• Within equity markets IT and Communication Services led the field as risk appetite increased. Cyclicals also had an up-week, a falling oil price is good for economic activity. Defensives, along with the Energy sector, showed notable underperformance, with Consumer Staples and Property down in absolute terms.

• The euro area bond market was flat, although a declining oil price and increased expectations of interest rate cuts in the US were positive influences. Their impact was offset by a switch to risk assets and news of faster government spending from Germany.

• At the end of the week, the US equity market has reached a new all-time high, and the euro area was not far from attaining its recent high once more. However, the run of good news is most likely already reflected in prices. The Iran-Israel ceasefire may be fragile, and we have yet to see final agreements emerge from the trade negotiations. Such uncertainties call for a cautious approach.

What were the main data releases this week?

• The major business surveys (PMIs) were relatively benign in implication. In the US, the composite survey did drop from 53 to 52.8 but this showing still represented an improvement on the consensus forecast of 52.2. The results were pulled down by the weak new orders sub-index in the Services PMI. The euro area Composite PMI for June was up slightly, and stable at 50.2, driven by the Services PMI, which was up 0.3 points to 50. So far, little impact has been seen from the prospect of tariffs. Eurozone firms are in “wait and see” mode regarding US-EU trade negotiations. These releases support our view of a mid-year slowing in the global economy rather than a significant drop in activity.

• The week provided a further update on consumer sentiment in the US. The Conference Board US consumer confidence survey dropped over 5 points, contradicting the expectation of a slight rise. Consumers’ perceptions of the health of the labour market deteriorated, pulling the overall index down. This survey has not been a fully accurate predictor of consumer behaviour, but it does highlight the main current area of concern: job growth. Labour market statistics are the most important guide to the overall path of the US economy.

What is the outlook for growth?

• Other policy developments beyond those affecting the Middle East also held positive signs for the growth outlook. In his comments on trade negotiations, US Commerce Secretary Lutnick noted that an agreement had been reached with China. Such an eventuality which would be a major relief to markets. Alongside the trade discussions, we saw the Chair of the Federal Reserve give his biannual monetary testimony to Congress. While the main message did not change, it was clear that the current resilience in the economy is allowing the committee to wait and see how the upcoming tariff price pressure unfolds.

• At the same time, Chair Powell indicated that the Federal Reserve leans towards the easing of rates. The committee would cut rates if the labour market were to deteriorate, or if the tariff price pass-through were to be minimal. In Germany, the government seems intent on releasing newly-agreed fiscal spending into the economy quickly. The government projects a total Federal deficit of 3.2% this year, much higher than forecast. The German government also plans to issue 20% more debt in the third quarter, in order to help fund its infrastructure and military spending packages.

The week ahead: what to watch out for

This week the big figure from the US will be the non-Farm Payrolls, but the major business surveys (ISMs) will also be released. In the euro area, the main focus will be the inflation report. From China, we will see the main business surveys (the PMIs).