A Strong Quarter Despite the Noise

June was another positive month for global markets, rounding off a strong quarter in which US and Asian equities delivered some of their strongest gains in years. Despite this, the path was not entirely smooth. Enthusiasm around AI hit a roadblock as investors questioned valuations and the scale of spending required to support future growth. At the same time, easing tensions in the Iran conflict helped oil prices fall back to pre-war levels, reducing some of the inflationary pressure that had worried markets. However, with the memory of policy mistakes in 2021 and 2022 still fresh in policymakers’ minds, central banks maintained a cautious tone. June also brought major political and corporate headlines, with the UK Prime Minister stepping down paving the way for Andy Burnham, while the largest IPO in history took SpaceX to the moon.

After months of elevated energy prices, signs of de-escalation between the US and Iran helped ease one of the primary risks hanging over markets. As both sides moved towards a ceasefire, oil prices fell sharply, with Brent crude trading around $72 a barrel by late June, its lowest level since the conflict began. Shipping traffic through the Strait of Hormuz improved as tensions eased, also helping to reduce supply pressure on other key inputs such as gas and fertiliser, both of which are sensitive to disruption in the region. This was a meaningful reversal from the higher energy prices that had been weighing on inflation expectations through the spring. The situation, however, remains fragile. While all sides appear to have an interest in de-escalation, markets remain vulnerable to renewed tensions, particularly given how quickly rhetoric and military action can shift between the US, Israel, and Iran.

Despite the easing in energy and other input price pressures, central banks maintained a cautious tone on inflation throughout June. The Federal Reserve’s June meeting, the first under new Chair Kevin Warsh, was more hawkish than markets had hoped. While the committee voted to keep rates unchanged, it removed its previous easing bias and released updated projections showing that almost all policymakers now expect rates to remain at current levels or rise by year end. Notably, Warsh chose not to submit his own rate projection, leaving markets to interpret his views through the tone of the statement and press conference rather than a clear numerical forecast.

The Bank of England struck a similarly cautious tone. It held its base rate at 3.75%, but the 7–2 vote included two members voting for a hike, showing that inflation concerns have not disappeared. UK CPI was unchanged at 2.8% in May, lower than feared, but the Bank still expects inflation to rise again as energy price effects take hold, with projections pointing to inflation above 3.25% by year end. The increase in hawkish dissent does suggest some policymakers believe pre-emptive action may still be needed to bring inflation down, while the majority would rather wait for clearer evidence that fading energy pressures are flowing through to the wider economy. However, given the UK’s weak economic growth and challenging fiscal backdrop, we believe the Bank of England is more likely to remain in the wait and see camp, unless inflation proves more persistent than currently expected.

As markets moved their attention from geopolitical risks back to fundamentals, investors became more sceptical of the sharp rally in AI-related shares. This led to a choppier month for technology stocks, as markets questioned whether valuations had become stretched and if the scale of spending required to build AI infrastructure can be justified by future profits. Semiconductor shares were hit hardest during the sell off, with a basket of stocks that track the sector suffering one of their worst single sessions of the year and the South Korean stock market falling sharply, reflecting its heavy exposure to the global AI supply chain. However, this volatility appeared to reflect a momentum unwind rather than a deterioration in fundamentals. Earnings from one of the sector’s key infrastructure beneficiaries proved this point, with Micron’s results in late June helping to lift sentiment after strong earnings growth reinforced the view that demand linked to AI infrastructure remains resilient. This momentum unwind is a normal feature in markets and a correction in momentum is very different from a bursting bubble. The key question for markets is increasingly when, and how, the hundreds of billions being committed to AI infrastructure will translate into profits.

On the corporate side, June delivered the IPO that financial markets had been building towards for months. SpaceX began trading on the Nasdaq under the ticker SPCX, and the listing more than lived up to its billing. The company priced its shares at $135 each, ultimately raising $75bn and implying a valuation of roughly $1.77tn, comfortably the largest IPO ever recorded. Demand was extraordinary even by the standards of a deal this size: the order book was more than two times oversubscribed, with around $150bn of orders chasing the $75bn available to purchase, and shares closed their first day of trading up 19%, valuing the company at approximately $2.1tn making Musk the first trillionaire in the process. Unusually for a deal of this scale, around 30% of shares were reserved for retail investors, a deliberate choice that helped fuel the frenzy of demand and gave ordinary investors a far larger slice of the deal than is typical. As we noted last month, a listing of this size inevitably pulls capital from elsewhere in the market, and a degree of repositioning around the listing contributed to some choppiness in broader technology shares through the month.

Bottom Line

June was another positive month for markets, helped by easing Iran tensions and lower oil prices. While central banks remain cautious and investors are asking more questions about valuations, the overall backdrop is still supportive, with resilient earnings and major corporate activity pointing to continued confidence.

Noteworthy

What happened to the fundamental case for gold?

In late January, investors were willing to part with almost $5,600 for an ounce of gold, a record high. Insatiable demand for the yellow metal was being fuelled by a perfect storm of investment narratives, inflation was above target, US government spending and debt were spiralling, and the unpredictability of Trump eroded confidence in US assets. This gave rise to the “dollar debasement trade” where the USD weakened as investors rotated out of US assets into alternative stores of value. Gold, whose supply is inherently constrained and lies beyond the control of any government, was a natural beneficiary.

The past five months have told a very different story. This week, bullion fell below $4,000 an ounce, capping its worst quarterly performance in a decade with a decline of 12%.  In the weeks following the market peak, conflict in Iran sent energy prices sharply higher, reigniting inflation concerns and the potential for interest rate hikes in the US. As yields increased, gold, which generates no income, lost some of its shine. At the same time, demand for the US dollar as a geopolitical safe haven strengthened the greenback, weighing further on gold. Attention also shifted to equity markets, blockbuster IPOs amidst an extraordinarily tech rally shifted investors out of their previously purchased gold. Chinese policymakers have also taken steps to curb gold purchases by both retail and institutional investors, removing another important source of demand. In our view, these developments have catalysed a move down but have left gold on a more sustainable footing by flushing speculative capital from the market. We believe the structural drivers discussed earlier remain in-tact, and we retain our overweight position across portfolios.

Andy Burnham for PM. What do the markets think?

With his victory in the Makerfield by-election and the subsequent resignation of incumbent Prime Minister Keir Starmer, Andy Burnham looks set for a July coronation as the next occupant of Number Ten. With the leadership contest all but settled, market attention has shifted away from who will lead the country and towards what a Burnham Premiership could mean for the UK economy and, crucially for gilt investors, the implications for government borrowing.

Burnham has publicly committed to retaining Rachel Reeves’ fiscal rules, offering reassurance to investors concerned that a leftward shift in government could result in materially higher borrowing. The more immediate question for markets is who succeeds Reeves as Chancellor. Ed Miliband would likely be viewed as the least market-friendly appointment, given expectations that he would pursue greater public borrowing, particularly to accelerate the net-zero transition. We have observed periods of weakness in both gilts and sterling as expectations of his appointment have increased. By contrast, Wes Streeting would probably be seen as a more fiscally disciplined choice, although there remains some risk that he could seek additional revenue through wealth taxes. Pat McFadden is widely regarded as the party’s leading fiscal hawk, while Shabana Mahmood is also viewed as a credible contender.

The Chancellor’s appointment will provide an important signal about the government’s economic priorities, but we believe any administration will face the same fiscal constraints that limited Starmer and Reeves. Across our portfolios we therefore remain underweight gilts, particularly at the long end of the curve where higher borrowing expectations would have the greatest impact.