Equity markets saw good gains last week as worries eased of a forceful Iranian retaliation to the US strikes on its nuclear facilities. This followed Iran’s well telegraphed and limited strike on a US military base in Qatar and the tentative ceasefire agreed between Israel and Iran.
Global equities gained 2.9% in local currency terms, although a 1.9% rise in the pound against a weak dollar to a 4-year high of $1.37 limited the gain in sterling terms to 1.4%. The US performed best, at least in local currency terms, with a 3.4% rise which took the main S&P 500 index back a little above its 19 February high for the first time.
The Magnificent Seven were up a sizeable 5%, led by Nvidia which was up as much as 10% on the back of comments from the CEO that robotics were the next big opportunity after AI. However, a large step-up in insider selling of the stock over the last month suggests company executives may not be quite as bullish as their leader makes out.
While the US may have regained its February high in dollar terms, it remains some 7.6% below in sterling terms as a result of a 9% drop in the dollar over this period. The rest of the world, by contrast, is now 1.4% above its previous high.
We expect dollar weakness to continue to undermine the performance of the US market, even if last week saw one source of concern removed. The section in Trump’s big, beautiful tax bill threatening foreigners with higher taxes on US investments has been removed from the bill which is now close to being signed off by Congress.
The largest impact of the easing in tensions in the Middle East was unsurprisingly on oil. The Brent oil price, which had briefly reached a high of $80/bbl, is back down to $67– its level before Israel bombed Iran. Gold has also retreated, falling 2.8% over the week to $3270/oz.
UK gilts and US Treasuries both returned around 0.5% last week, benefiting from a 0.1% fall in yields. 10-year US Treasury yields are now back to 4.25%, 0.5% below their high at the start of the year, while 10-year gilt yields are down to 4.5%.
We have expected bond yields to remain volatile as a result of all the policy uncertainty and this is proving the case. Yields now look somewhat on the low side and could well move back up again over coming months.
Fed policy remains a key driver of yields not only in the US but also the UK. Last week saw Fed Chair Powell confirm that a US rate cut was not on the cards until September, by when the impact of the tariff hikes on inflation would be rather clearer. The effect in May was smaller than expected, although Friday saw news that the Fed’s favoured measure of core inflation rose to 2.7% from 2.5%.
While its latest projections show the Fed only forecasting rates to decline 0.5% later this year and 0.25% next year, the market is taking the view that rates will fall by rather more. With Trump clamouring for big rate cuts, the successor appointed by Trump to succeed Powell next May will almost certainly be rather more disposed to cutting rates. Indeed, Trump is talking of announcing the new Fed Chair early and having a ‘shadow’ chair in the meantime.
Still, fiscal policy could easily reappear as a source of some upward pressure on bond yields. In the US, the budget bill looks set to keep the deficit at a high 6-7% of GDP for the foreseeable future. Meanwhile in Europe, NATO has now agreed to commit to raising defence spending substantially to 5% of GDP by 2035.
Here in the UK, the budget deficit is a rather more immediate problem for the government. Starmer’s recent U-turns on winter fuel payments and welfare reform have left it with an additional £4.25bn hole to fill if the Chancellor is to stay within her fiscal rules. These had already been looking taxing and fears of further tax rises in the autumn have only increased further.
This coming week, the main focus for the markets – as ever – will be the US. Friday’s payroll numbers for June will be closely watched for signs of a slowdown. But the weekend also sees the end of the 90-day reprieve on US reciprocal tariffs.
In theory, this could see US tariffs raised for a host of countries from the baseline 10% level now in place to the exorbitant rates outlined on Liberation Day on 2 April. But true to his ‘TACO’ moniker, Trump has already started to say that this deadline could be changed.
Rupert Thompson – Chief Economist