June was a solid month for share markets to end the financial year in positive shape – boosted by a reduction in tariff
tensions, expectations of central bank rate cuts and resilient economic data. Markets have recovered sharply from the 7 April
lows reached shortly after President Trump’s “Liberation Day”. The most significant developments over the past month were
lower inflationary pressures emanating from tariffs than expected, stronger bond markets, and a speedy ceasefire achieved
following US intervention in the war between Israel and Iran which has put a lid on Iranian ambitions of reaching nuclear
weapon capabilities for the immediate future. The consequent reduction in the crude oil price provided a lift to investor
sentiment, adding impetus to major sharemarket indexes reaching new record levels.
Sharemarkets
Australian shares rose in June, with the ASX 200 up +1.1% to end the financial year with a gain of 9.7%. Australian shares
have rebounded 18% from the April low, but the gains have been driven by PE expansion, rather than by a growth in
earnings. The ASX 200 forward PER is over 19x, back to the highs of November 2024 reflecting stability in commodity prices
and improved investor sentiment.
A large component of the gain in the index has been driven by Commonwealth Bank shares, which hit a new record high,
and which have become a favourite of overseas investors looking for assets outside of the US and which are not impacted
by a potential weakening of the US dollar. We regard CBA’s share price as an aberration which does not reflect fundamental
value, but rather the flow of asset allocation and index funds which has driven the price of shares to unsustainably
high levels.
In June, major developed market equity indices delivered mixed returns amid ongoing geopolitical tensions and evolving
monetary policy expectations. In the US, the S&P 500 Index rose by 4.4% during the month, bringing its 12-month total
return to 13.2%, driven by resilient corporate earnings and investor optimism about potential Federal Reserve rate cuts.
Wall Street investors set aside tariff headlines to drive stocks to record highs, amidst signs of a cooling in Middle East
geopolitical risks and evidence the US economy is holding up with subdued inflation. Tech mega caps led gains, with Nvidia
approaching the $4 trillion mark. President Trump touted progress on trade deals with a few countries, naming agreements
with China and the UK, while saying he was ending discussions with Canada. With earnings season around the corner, stocks
will get a major test.
In Europe, the MSCI Europe Index gained 1.8% for the month, with a 12-month return of 10.2%, supported by easing inflation
and expectations of continued monetary accommodation by the European Central Bank. Germany was particularly strong
over the last 12 months with a total return of 31%, reflecting optimism with new Chancellor Friedrich Merz’s commitment to
boosting investment, increasing debt limits and re-arming Germany with a 5% of GDP defence commitment within 10 years.
In Japan, the Nikkei 225 Index advanced 7.8% in June, as the Bank of Japan maintained its accommodative stance and
economic data showed moderate growth.
Bond Markets and Economic Data
Global bond markets experienced modest movements in June.
In the United States, the 10-year Treasury yield decreased slightly to 4.26%, as investors weighed the potential for Federal
Reserve rate cuts later in the year and noted the lack of tariff-induced inflationary pressures to date.
The US economic data was mixed. US consumer sentiment hit a 4 month high in June as inflation expectations improved,
but other data painted a less encouraging picture. Purchases of new homes fell in May by the most in 3 years. Recurring
applications for unemployment benefits are now at the highest level since 2021, aligning with other data pointing to a
slowdown in the labour market. Consumer spending declined in May by the most since the start of the year.
Data also showed that while the core personal consumption expenditures price index rose slightly more than expected, the
pace was consistent with limited price pressures that will allow the Federal Reserve to resume rate cuts later this year.
Those reports were backdrop to testimony by Fed Chair Jerome Powell before Congress, where he said interest rates would
probably be coming down already if not for uncertainty around Trump’s trade policies. He joined other central bank officials
who made clear in speeches that they will need more time to be sure tariff-driven price hikes won’t raise inflation in a
persistent way.
In Australia, the 10-year bond ended the month at 4.15%, indicating a slight uptick in bond prices.
Currency Markets
The AUD finally caught a bid, reflecting slight weakening of the USD rather than inherent strength. The AUD/USD exchange
rate closed the month at US$0.653. We expect the AUD to strengthen into the end of the calendar year.
The USD was stable during June, with investors closely watching Federal Reserve policy signals and geopolitical
developments. Yet President Trump’s trade policies and rising debt levels have sparked a sharp decline in first half of 2025.
The US dollar has had its worst start to the year since 1973, as Trump’s trade and economic policies prompt global investors
to rethink their exposure to the world’s dominant currency.
The US dollar index, which measures the currency’s strength against a basket of six others, including the pound, euro and
yen, tumbled 10.8% in the first six months of 2025, the worst start to the year since the end of the gold-backed Bretton
Woods system. We expect the USD to continue to weaken in the near and intermediate term as international investors
diversify out of US assets.
Commodities
Commodity prices were influenced by geopolitical tensions and supply dynamics. Crude Oil prices experienced volatility
due to the Middle East conflict, and especially during the period when Iranian officials threatened the closure of the Strait of
Hormuz. Post the ceasefire, crude oil ended the month lower than pre-conflict levels, as supply disruptions were less severe
than feared. Crude oil stabilised around the US65/Bbl level.
Gold prices rallied amid increased demand for safe-haven assets, reflecting investor concerns over geopolitical risks, but
ended the month slightly lower at US$3,295/t.oz. Gold is up a strong 41% over the last 12 months.
Copper prices rose on expectations of increased demand and supply constraints. It finished the month at US$5.06/Lbs, and
has risen 14% over the last year. Iron ore prices declined 5% over the month to US$94.5/T and are down 11% over the year,
largely due to concerns about oversupply and weakening demand from China.
Central Bank Policies and Inflation
In the US, the Federal Reserve kept interest rates at 4.25% to 4.5%, citing solid economic growth and inflation concerns
influenced by tariff policies. In the Eurozone, the European Central Bank cut its key interest rate by 0.25% to 2%, marking its
eighth reduction since June 2024, amidst declining inflation and slowing economic growth. In the United Kingdom, the Bank
of England continued its gradual rate-cutting cycle, balancing the need to support economic growth with inflation control.
In Australia, the Reserve Bank signalled the possibility of further rate cuts, as inflation eased to 2.1% in May, the lowest since
October 2024. The Australian Consumer Price Index (CPI) data for May 2025 showed inflation continuing to ease, potentially
reducing household financial strain. This could encourage the RBA to consider interest rate cuts at its 8 July 2025 meeting
to stimulate growth in sectors like retail and housing. However, global trade uncertainties, particularly US tariffs, may pose
risks to Australia’s export-driven economy.
Geopolitical Developments
The Russia-Ukraine conflict persists with limited territorial changes. Ukrainian President Volodymyr Zelensky warned that
rising oil prices, driven by Middle East tensions, could bolster Russia’s war effort through increased export revenues. In the
Middle East, the US conducted missile strikes on Iranian nuclear facilities, leading to a fragile cease‑fire between Israel and
Iran. In a significant development which could have lasting economic implications for Europe, NATO members agreed to
raise defence spending to 5% of GDP by 2035, reflecting heightened security concerns.
In summary, June 2025 was marked by cautious optimism in financial markets, as investors navigated the interplay between
monetary policy shifts, commodity price fluctuations, and geopolitical uncertainties.
