Market Review 16th June 2025

Everything you need to know, Simplified!

Summary

• Israeli strikes on Iranian nuclear infrastructure and Iran’s retaliatory missile attacks have reignited geopolitical risk, sending oil prices up 13%, while gold surged 3.7% to a 31.7% YTD gain

• A framework US-China deal reached in London pledges increased rare earth exports from China and continued access for Chinese students in the US; markets were unmoved, suggesting the TACO (Trump Always Chickens Out) trade may have run its course

• Chimerica may still be under pressure; the longstanding US-China capital flow dynamic -where America borrows and China saves - faces long-term strain in a more multipolar world, and economists may be underestimating the extent to which geopolitics drives macro

• The US Federal Reserve (Fed) is expected to hold rates steady but may signal fewer cuts ahead, as political pressure mounts

• The Bank of England (BoE) is also likely to hold, though softer data and easing wage growth could tilt the Monetary Policy Committee (MPC) more dovish.

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Market Review

The Price of Pre-emption

Oil markets have been reawakened by geopolitics as Israel launched targeted strikes on Iranian nuclear facilities, military leadership, and weapons infrastructure in a pre-emptive move to halt nuclear escalation. In response, Iran has been firing missiles at Israel and announced plans to inaugurate a new uranium enrichment facility, an act that would deepen its non-compliance with international nuclear agreements.

The strikes follow the collapse of diplomacy between Iran and the West. Negotiations have stalled over Iran’s right to enrich uranium, while the International Atomic Energy Agency formally censured Tehran for failing to meet its obligations. In response, Iran warned it could withdraw from the Non-Proliferation Treaty (an international treaty aimed at preventing the spread of nuclear weapons) altogether. The US has ordered personnel out of Iraq, while Israel and Gulf states remain on high alert.

Oil prices posted their biggest jump since October before easing slightly. The West Texas Intermediate (WTI) closed at $73/bbl, up 13% on the week. Gold rose 3.7%, extending its year-to-date gain to a striking 31.7%.

US inflation was softer than anticipated in May, which helped drive treasury yields lower. The US 10-year yield fell 0.11% to close the week at 4.4%. Lower energy prices have helped to cool inflationary pressures in recent months, this may now be at risk. High energy prices also tighten financial conditions, weighing on economic activity.

‘Chimerica’

Trade negotiations in London have yielded a framework agreement between the US and China. The deal includes a pledge from China to boost exports of critical rare earth minerals to the US, while Washington has agreed to maintain access for Chinese students at American universities. Crucially, tariffs are unlikely to rise from their currently reduced levels.

Markets took the news in stride. The muted reaction suggests the outcome was already priced in; evidence that the ‘TACO’ trade may have run its course. With risk assets having fully recovered from the April decline, investors may now be underappreciating the lingering risks. US equities fell 0.4% on the week, trimming year-to-date gains to 1.4%.

Behind the headlines is something more structural. With the hawkish trade rhetoric now dialled down, many assume that global trade can continue to function as it has for decades, i.e. with the US running a massive current account deficit, funded by foreign capital inflows. When China joined the World Trade Organization in 2001, it unlocked the greatest labour arbitrage in modern history. Western companies shifted manufacturing east, cutting costs, hollowing out domestic industry, and driving inequality, but creating a deep economic symbiosis between the US and China.

A decade ago, historian Niall Ferguson called this relationship Chimerica: America spends and consumes, China saves and manufactures. It’s a neat framework for the capital flows we’ve seen ever since. The US runs structural trade deficits, matched by capital account surpluses as foreign buyers fund cheap government debt and fuel equity market strength. This system, underpinned by globalisation, may not be possible in a more fractured, multipolar world. Economists may underappreciate the extent to which geopolitics has driven capital flows.

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The week ahead

Wednesday: Fed rate decision

Our thoughts: The Fed are expected to hold rates at 4.5%. Bloomberg economics expect a more hawkish dot plot, showing that the Federal Open Market Committee (FOMC) expect to cut only once this year, the market expectation is currently for two 0.25% cuts. In the face of four soft inflation prints many, particularly on the Republican right are growing frustrated with Powell’s lack of action, especially given that under President Biden, the Fed responded to early economic weakness with an immediate 0.5% cut. Since Trump took office the real (adjusting for inflation) Fed funds rate has risen by 0.5%. The committee see upside risks to inflation but the longer they wait the more they will be politicised.

Thursday: UK rate decision

Our thoughts: The BoE is anticipated to hold rates steady, but the MPC spectrometer may show a more dovish tilt in the face of a slowing UK economy and loosening labour market. Inflation since the previous meeting has risen although this has been driven by volatile energy costs while more structural cost pressures such as wage growth have eased. Economic growth also undershot in April showing a -0.3% contraction.

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