Macro
Markets remained surprisingly calm despite significant geopolitical escalation over the weekend. Markets stayed calm after the U.S. struck Iranian nuclear facilities on June 22 and Iran retaliated with missiles targeting a U.S. base in Qatar on June 23, with neither action hitting energy infrastructure, prompting oil prices to drop over 7.2%, with Brent closing around $71.5 and WTI at $68.5 per barrel. Global equities edged higher while energy shares lagged, and the dollar weakened. FX derivatives volumes remain elevated, underscoring ongoing hedging activity amid stable but cautious condition.s
This measured exchange has reinforced investor complacency, but risks remain high. Iran’s parliament is now pushing to close the Strait of Hormuz, and future retaliation via proxies—particularly targeting Iraqi oil infrastructure—could trigger a sharp repricing. With little risk premium priced in and macro data still weak, the current setup leaves asymmetric downside if tensions escalate.
Rates
The Federal Reserve held rates steady again, constrained by sticky inflation expectations despite softer May CPI. Governor Waller floated the idea of a July rate cut, suggesting tariff-driven inflation should be seen as transitory. Still, most of the FOMC remains cautious, and markets continue to price in the first cut by September.
Long-end U.S. yields remain elevated, with 10-year Treasuries near 4.4%, driven by rising term premia and foreign outflows. While April saw only a $36 billion drop in foreign holdings, Fed custodial data suggests that selling intensified in May and June. The disconnect between rising yields and slowing growth reflects fiscal concerns and distorted bond-equity dynamics. Front-end U.S. yields remain elevated relative to fundamentals, reflecting lingering tariff-related inflation risks.
In this backdrop, curve steepeners remain the favoured positioning. With the 2s10s spread deeply inverted, the trade offers convexity in both bull and bear scenarios. Traditional bond hedges have lost reliability—steepeners provide a cleaner way to hedge equity risk without reaching into riskier assets.
In the UK, the BoE held rates at 4.25%, but a 6–3 vote and dovish tone signal that cuts may begin as early as August. The labour market is weakening—May payrolls fell by 109k, the largest drop since 2020—while wage growth is expected to cool. Inflation remains above target at 3.4%, but the BoE projects it will stay below 3.5% through the end of the year.
We expect both UK rates and sterling to decline into 2025. UK Gilts look attractive in local currency, but the pound remains vulnerable due to persistent external imbalances and geopolitical fragility.
The BoE held rates at 4.25%, a cautious but appropriate move amid sticky 3.4% inflation and weakening growth. With wage pressures easing and hiring slowing, we expect the cutting cycle to begin by August, pushing both rates and the pound lower into 2025. UK Gilts offer value in local currency, but the pound faces structural headwinds from persistent external imbalances and a possible balance-of-payments strain. The divergence—lower yields and FX risk—presents selective opportunities for hedged investors.
Equities
U.S. equities ended the week on a cautious note as stretched valuations met growing concern over a potential earnings slowdown. While hopes remain for productivity-driven surprises or a boost from a weaker dollar, downside risks persist, particularly if slowing growth pressures corporate margins. Tech remains a key swing factor, but earnings visibility is limited. With the dollar expected to weaken further, foreign investors may face additional FX headwinds. In comparison to Europe and Japan, U.S. equities may underperform in the coming months.