Have investors become immune to bad news stemming from policies and geopolitics? June was a favorable month for investment returns, particularly for U.S. equities, which have regained more lost ground, with the S&P 500 and NASDAQ reaching all-time highs. Yet, uncertainties persist due to tariff tensions, questions about U.S. fiscal sustainability and the U.S. Federal Reserve’s (Fed’s) lack of urgency to cut rates. The Israel attack on Iranian nuclear facilities, later joined by the U.S., also failed to deter investors. We believe the markets are not ignoring these risks; rather, they are employing active management to mitigate the impact of these events.

Avoid the energy straitjacket

Israel and Iran engaged in missile exchanges as Israel accused Iran of developing nuclear weapons. On June 21, the U.S. launched its own attack on Iranian nuclear facilities, deploying “bunker buster” bombs on the deep underground facilities in Fordow. Iran retaliated by striking a U.S. military base in Qatar. Subsequently, Israel and Iran announced a ceasefire, pending further negotiations.

The market's reaction to these missile exchanges was calm. Oil prices rose modestly during the initial confrontation but reverted to below USD 70 per barrel once the ceasefire was announced. We don't believe investors were complacent; rather, it is challenging to accurately price geopolitical risks.

For instance, Iranian oil exports constitute less than 2% of global consumption, most of which goes to China. Therefore, the overall impact on the global economy from an Iran-only disruption should be limited. However, an extreme scenario could involve Tehran blockading the Strait of Hormuz, affecting over 20% of global oil consumption. This would significantly impact Asian oil importers, including China, India, Japan and South Korea. Investors seem reluctant to price in this extreme scenario due to the unpredictable nature of geopolitics.

This is why the impact of geopolitical events on markets is typically short-lived and often downplayed. Investors are simply connecting the potential impact, or lack thereof, on economic growth and earnings.

Kicking the can further down the road?

Since "Liberation Day," the Trump administration has reached some form of trade agreement with the UK and China. It appears other trade partners, such as the euro area, India, Japan and South Korea, are all striving to secure the best deal with the U.S. before the 90-day postponement of reciprocal tariffs ends in early July. This is not only about negotiations with the U.S.; these governments also need to manage their voters' expectations. Additionally, trade negotiations are complex, with comprehensive agreements taking months, if not years, to finalize.

The question is whether the Trump administration will extend the reciprocal tariff postponement or allow import taxes to take effect. Given the potential impact on the U.S. economy, investors likely expect the White House to extend the truce to allow more time for negotiations and eventually reach a high-level consensus with key trade partners. Hence, the peak U.S. tariff rate on April 8 at 30%, largely due to the 145% tariff against Chinese imports, could represent the worst-case scenario for investors. They are also arguably expecting the baseline 10% tariff on all imports to remain, given the precedents set with the UK and China.

Meanwhile, investors are differentiating companies with low exposure to tariff tensions. Since April 2, 291 stocks in the S&P 500 Index have risen, while 214 have dropped. Technology companies and banks have been outperformers, as artificial intelligence (AI) development, demand for hardware and financial deregulation support their earnings outlook.

One Big Beautiful Bill

At the time of writing, the One Big Beautiful Bill Act (OBBBA) is being debated in the Senate and could pass both houses in days. Overall, the impact on the U.S. federal government's fiscal position is significant in the long term, potentially boosting the government debt-to-gross domestic product (GDP) ratio from 98% in 2024 to 130% in ten years.

There could be positive economic impacts in the near term. Many proposed tax cuts would retroactively take effect on January 1, 2025, meaning taxpayers could receive significant tax refunds in early 2026, although this could be partially offset by more expensive consumer goods due to tariffs.

The shift in the shape of the U.S. Treasury (UST) yield curve since U.S. President Trump's inauguration reflects this contrast in the impact on the economy and fiscal sustainability. Since January 20, the 2-year UST yield has fallen by 55 basis points (bps), the 10-year UST by 35 bps, and the 30-year UST by less than 10 bps, implying a steeper yield curve. This could indicate investors are reducing demand for long-tenor UST due to long-term supply concerns while focusing more on short-tenor UST as growth is expected to ease in the second half of 2025.

What does it mean for investors?

We expect policy uncertainties from the Trump administration to remain high in the coming months. While we may gain more clarity on fiscal policy and tariff negotiations, we must also be mindful of unintended or unforeseen consequences from these policy changes.

As discussed above, investors are not ignoring these developments or being complacent. Instead, they are assessing the impact of these policies and targeting areas with fewer headwinds or even positive tailwinds.

We have recommended a well-diversified portfolio since the start of the year and reiterated this idea in our 2025 Mid-Year Outlook. There is still a strong investment case for U.S. equities, but investors should focus more on technology and high-quality companies. Meanwhile, Chinese, European and Asian equities are also benefiting from less demanding valuations and emerging investment themes. In Europe, more room for fiscal spending is helpful, even though the theme of investing in national defense has progressed significantly. In China, a shift in consumer spending patterns from luxury goods to smaller ticket items is underway, alongside tech development. A weaker U.S. dollar (USD) can also drive more capital flow into Asian equities.

For fixed income, income generation from corporate credit should continue even if the U.S. economy experiences a gradual, rather than an abrupt, slowdown in growth. Finalizing the OBBBA could potentially mark the near-term peak in long-tenor U.S. Treasury yields as investors digest the long-term impact of rising deficits. Nonetheless, active duration risk management remains crucial in response to shifts in economic data, which we believe should weaken in the months ahead, versus new policy initiatives.

Global economy

• The U.S. economy remains resilient but shows signs of slowing. The 1Q25 GDP was revised lower from a -0.2% to a -0.5% annualized growth rate. Labor market data also weakened slightly, with continued claims at the highest level since November 2021, the labor market differential falling, and non-farm payroll growth continuing to slow. The May consumer price index (CPI) print showed limited pass-through from tariffs to inflation for now. CPI and core CPI rose at annual rates of 2.4% and 2.8%, respectively, generally softer than expected. Core goods (such as vehicles and apparel) prices fell but are susceptible to tariff-related jumps later in the year. In the June FOMC meeting, the Fed maintained interest rates at 4.25-4.50% and will likely remain on hold until later in the year.
  (GTMA P. 25, 30, 31)
• In the other developed markets, eurozone inflation eased to 1.9% in May from 2.2% in April, below the European Central Bank’s (ECB) target currently, mainly due to a decline in energy prices and services inflation. The economy expanded 1.5% year-on-year (y/y) and 0.6% quarter-on-quarter, faster than expected. The ECB cut its deposit rate by 25 basis points (bps) but signaled a potential pause in its rate-cutting cycle.
  (GTMA P. 16, 20, 33)
• In Japan, core inflation slowed in June to 3.1% y/y but remained above the Bank of Japan’s (BoJ’s) target. Manufacturing activity also recovered, with manufacturing purchasing managers’ index (PMI) rising to 50.4 after nearly a year in contraction, but the outlook remains clouded by U.S. tariffs and the global economic outlook. The BoJ kept rates steady at 0.5% and will slow the pace of reduction in its bond purchases, signaling a cautious approach to normalizing monetary policy.
  (GTMA P. 13, 17, 20)
• China's NBS manufacturing PMI increased to 49.7 in June from 49.5 in May, but remains in contractionary territory as factory managers continue to struggle to find domestic buyers amid sluggish demand overseas due to trade tensions. Non-manufacturing PMI increased to 50.5 in June from 50.3 in May. CPI continued its decline, falling 0.1% y/y in May, marking the fourth consecutive month of decline. Industrial profits also fell sharply by 9.1% y/y, reversing a two-month growth streak due to weak demand and falling industrial product prices.
  (GTMA P. 4, 5, 6, 7, 8)

Equities

• Global equity markets were positive in June, with the MSCI AC World returning 4.4%. Developed markets (4.2%) underperformed emerging markets (5.7%). The MSCI World was supported by the U.S. (5.0%), while Europe and Japan underperformed with 2.0% and 1.6% returns in USD terms, respectively. Year-to-date, MSCI Europe still outperformed major markets with 20.7% returns, followed by China at 15.5%, compared to 5.6% for the U.S.
  (GTMA P. 34, 35)
• In the U.S., the S&P 500 and NASDAQ both hit fresh record highs toward the end of June. The two indices returned 5% and 6.6%, respectively, although intra-month volatility was high given the trade, fiscal, geopolitical and Fed headlines (VIX rose above 21 mid-month). Technology outperformed with 9.7% returns, followed by communication services at 7.2%.
• Asian stocks rose for a third consecutive month, with general outperformance of technology stocks as well. South Korea’s KOSPI outperformed with 13.9% returns on the back of the election of a market-friendly president and the potential revamp of the “value up” program. Hong Kong’s Hang Seng and Taiwan’s TAIEX were also buoyed by renewed optimism over AI, returning 3.4% and 4.3%, respectively. MSCI Southeast Asia was flat at 0% returns, due to the lack of technology exposure, while Thailand lagged due to political turmoil.
  (GTMA P. 34)

Fixed income

• Yields on U.S. Treasuries were firmer across the curve, with 2-year, 10-year and 30-year yields down 18 bps, 16 bps and 12 bps, respectively, as markets anticipate a weaker jobs report for June and therefore have priced in earlier and more aggressive interest rate cuts over the month. Yields on Japanese government bonds were little changed, with the 10-year yield edging 6 bps lower to 1.44%, as the BoJ announced plans to slow its tapering and pushed back on commitments to further rate hikes despite core inflation rising further domestically.
  (GTMA P. 58, 63)
• Global investment grade bonds returned 2.3% over the month, in USD total return terms, while global high yield bonds also posted a 2.3% gain, as lower Treasury yields and spreads helped returns.
  (GTMA P. 58, 61)

Other financial assets

• Commodities were broadly stronger in June, with the DJ/UBS Commodity Index rising 2%. Brent crude touched USD 78.9 mid-month due to supply chain disruption concerns arising from the Israel-Iran conflict, but ended the month at USD 66.7, which was 6.3% higher than where it started. Along with oil prices, gold rose to USD 3431 mid-month, before ending the month flat with a 0.3% return at USD 3278.
  (GTMA P. 77, 78, 79)
• The DXY index fell 2.5% over June to 96.9,  with the U.S. dollar at its weakest against the euro since 2021. The Australian dollar, Chinese yuan and most other Asian currencies also strengthened against the U.S. dollar, except for the Japanese yen, which was flat over the month.
  (GTMA P. 73, 75)

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