Trade Diplomacy, Policy Recalibration, and Fragile Optimism

June 2025 was a month defined by geopolitical breakthroughs, dovish central bank shifts, and re-emerging fiscal risks, sending mixed signals across global markets. Equities surged to record highs, fixed income markets repriced for imminent rate cuts, commodities recalibrated on fading geopolitical risk premiums, and currencies traded within tight ranges, reflecting cautious optimism tempered by persistent macroeconomic headwinds.

United States:

Trade Deals, Fiscal Uncertainty, and Dovish Signals

President Trump moved closer to finalising a series of trade agreements ahead of the July 9 tariff deadline, with Commerce Secretary Howard Lutnick stating top deals with multiple countries were imminent, potentially including India. Optimism over these pending deals lifted market sentiment, with the S&P 500 gaining 0.5% to a new record high, the Nasdaq 100 rising 0.5%, and the Dow Jones up by 432 points. Markets shrugged off Trump’s threat to halt Canadian trade talks, focusing instead on the framework deal reached with China, easing fears of a re-escalation in tariffs.

However, economic data showed mixed signals. Q1 GDP contracted by 0.5%, the largest decline in over a year, while consumer spending fell sharply, and continuing jobless claims rose to their highest since 2021. Inflation pressures moderated further, with University of Michigan year-ahead inflation expectations dropping to 5%, their lowest in three months. Core PCE inflation remained subdued, reinforcing expectations of an earlier-than-expected Fed rate cut.

Fed Chair Powell delivered a notably dovish congressional testimony, suggesting that absent tariff risks, the Fed’s rate-cutting cycle would have continued. Markets now anticipate a cut as soon as September, with US 10-year Treasury yields ending the month slightly higher at 4.26%, following five sessions of decline. Fiscal concerns loom, however, as Trump’s proposed “One Big Beautiful Bill”, with a projected $4 trillion cost, raised fears of future debt sustainability risks, potentially offsetting the supportive impact of near-term monetary easing.

United Kingdom:

Inflation Softens, BoE Turns Dovish, Budget Pressures Mount

In the UK, macroeconomic data showed inflation easing slightly to 3.4% in May, from 3.5% in April, largely due to falling transport and housing costs despite higher food prices. BoE Governor Andrew Bailey and Deputy Governor Dave Ramsden signalled that UK rates are on a downward path, citing slower wage growth, rising unemployment, and slack in the labour market. Gilt markets responded positively, with 10-year yields falling below 4.53%, their lowest since early May, as traders priced in a potential rate cut later this summer.

However, the UK fiscal outlook remains challenging. Chancellor Rachel Reeves faces mounting pressure from rising borrowing costs and public spending demands, while market concerns over fiscal resilience remain elevated. Sterling strengthened modestly through June, supported by easing inflation and improving trade sentiment, despite fiscal headwinds.

Equity markets posted mixed results. The FTSE 100 gained over 0.5% on its final June session, led by JD Sports (+7%) following upbeat Nike earnings, and broad-based gains in banking stocks including Standard Chartered (+2.5%), Barclays (+2%), and HSBC (+1%). Autos and defensives like Rolls-Royce and AstraZeneca also advanced. However, the FTSE 100 still recorded its second consecutive weekly loss, reflecting persistent caution over domestic growth and fiscal risks.

EU:

Trade Optimism, Fiscal Expansion, and Diverging Confidence

In Europe, trade optimism lifted markets as the US and China finalised their trade agreement under the Geneva consensus, while US policymakers softened rhetoric on upcoming tariff deadlines. The STOXX 50 gained 1.5%, with the broader STOXX 600 rising 1.1%, driven by strong gains in industrials and autos.

Inflation prints in France (0.8%) and Spain (2.2%) rose more than expected but remained within ECB comfort zones. The German 10-year yield hovered around 2.5%, as markets weighed the country’s record investment budget for 2025 and 2026 against its increased debt issuance plans and NATO’s new defense spending targets of 5% of GDP by 2035, raising long-term fiscal sustainability concerns.

The Euro Area Economic Sentiment Indicator slipped to 94 in June, down from 94.8, driven by falling industrial and consumer confidence, though services and construction sentiment improved. Unemployment fell to a record-equalling low of 6.2%, highlighting labour market resilience despite weaker growth expectations.

Commodities:

Oil Retreats on Easing Risks, Gold Falls on Risk-On Flows

Oil markets were volatile. WTI crude futures settled at $65.5 per barrel, down 11% on the week – their sharpest weekly decline since March 2023. Prices initially spiked above $80 amid Iran-Israel tensions but reversed sharply after President Trump announced a ceasefire. Market focus shifted back to fundamentals, including OPEC+ supply decisions, strengthening summer demand, and record Chinese imports of Iranian crude.

Gold prices declined toward $3,280 per ounce, the lowest level in four weeks, as trade breakthroughs and easing geopolitical tensions reduced safe-haven demand. Bullion recorded its second consecutive weekly loss, despite dovish Fed commentary, as investors rotated back into equities and higher-yielding assets.

Currencies: Tight Ranges Reflect Balanced Sentiment

Currency	June Movement	Drivers	Outlook
USD	Slightly weaker	Dovish Fed, weaker GDP	Neutral to bearish if cuts proceed
GBP	Strengthened	Inflation easing, BoE dovish pivot	Neutral to bullish if growth stabilises
EUR	Stable	Balanced ECB cuts vs fiscal expansion	Neutral, watching inflation and sentiment data

Market Sentiment and Outlook for July

June closed with cautious optimism. Equity markets were buoyed by trade progress, dovish central banks, and resilient earnings. However, persistent growth headwinds remain visible in the US (negative GDP growth), UK (labour market weakness), and EU (industrial confidence decline). Fiscal risks are emerging as a common theme, with the US, UK, and Germany planning expansive budgets that could fuel long-term debt sustainability concerns.

Markets will enter July watching key inflection points:

• US tariff deadlines (July 9), with potential re-escalation risks if deals stall

• Upcoming OPEC+ production decisions

• Labour market and inflation data across the US, UK, and EU

• Political developments, including President Trump’s potential Fed Chair nomination by autumn, which could shift monetary policy trajectory

June delivered optimism through trade diplomacy and dovish policy, but underlying economic fragility and fiscal vulnerabilities remain. Investors should remain selective: focus on quality equities with global exposure, maintain tactical fixed income duration positioning to capture upcoming central bank moves, and adopt disciplined commodity trades amid geopolitical volatility. July’s outcomes will determine whether markets extend this risk-on rally or pivot to defensive positioning as macro realities reassert themselves.

Source: CNBC, Bloomberg, FTnews, TradingEconomics and Reuters.

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