Market Update - 25 June 2025

Markets find footing as Middle East tensions cool and rate cuts loom

This past week, markets were heavily influenced by geopolitical events in the Middle East, just not in the way many might have expected. After President Trump ordered U.S. bunker buster bombs to target Iran's nuclear enrichment sites over the weekend, equities have risen, led by the U.S. (up 2%) and emerging markets (up 3%). Initial concerns about potential oil supply disruptions caused oil prices to jump by 20% only for them to end up where they started in the last few days.

Contributing to this, Iran's response was surprisingly measured - they targeted some U.S. military bases but gave advance warning, resulting in no casualties. This, combined with comments from U.S. President Donald Trump hoping the conflict was resolved, caused a dramatic reversal in market sentiment. Oil prices plummeted nearly 10% as fears of a prolonged conflict disrupting oil shipments through the Strait of Hormuz dissipated. By the end of the week, oil had given up nearly all its gains from when the tensions first flared.

Focus then shifted back to economic data and central bank policy. Several Fed officials gave dovish signals, with Michelle Bowman and Christopher Waller expressing openness to cutting rates as soon as July if inflation remains contained and labor markets weaken further. This contrasted with the median FOMC dot plot which indicated no change to rates this year. Fed Chair Jerome Powell reiterated a patient stance in his congressional testimony, but acknowledged they could cut sooner if needed. Markets are now pricing in nearly 60bps of Fed cuts by year-end.

PMI data was mixed but showed some stabilisation. U.S. manufacturing held steady while services dipped slightly. Europe saw modest improvements, especially in Germany, lifting the composite PMI just above 50. The UK also ticked up despite recent economic headwinds.

Other data pointed to a slowing U.S. economy. Consumer confidence fell sharply on weaker expectations. Home prices declined again, presenting headwinds to consumption via wealth effects. The U.S. dollar slid to near multi-year lows.

Locally, the Australian monthly CPI  for May came in below expectations more or less across the board which will give the RBA more room for manoeuvre if the economy weakens. However, the market already had a high probability off a cut at the next meeting on July 8th and has pencilled in 3-4 more cuts by the end of the year so the market reaction was fairly muted.

In summary, markets breathed a sigh of relief as worst-case scenarios were avoided in the Middle East. However, the economic data flow and major central bank pivots towards easing continued to paint a picture of a global economy losing momentum.