In this month’s investment summary, our Chief Investment Officer, Jeff Brummette, unpacks what turned out to be the strongest month of the year for U.S. equities; an outcome few would have predicted given the heightened geopolitical tensions, particularly the U.S. and Israeli strikes on Iran, and ongoing uncertainty surrounding President Trump’s tax reform bill. Despite these headwinds, markets rallied on the back of diminished fears of wider conflict, easing trade tensions, and shifting expectations around global monetary policy.
Jeff explores the surprising resilience of equity and fixed income markets, the continued decline of the U.S. dollar, and the growing divergence between U.S. economic policy and that of other major regions such as Europe and China. He also discusses how these dynamics are shaping our current asset allocation decisions and influencing our outlook for the next few months ahead as we enter Quarter 3.
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If we had told you at the beginning of June that it would be the best month for U.S. equities all year, despite the U.S. and Israel bombing Iran, no major trade agreements being signed with the U.S. and its key trading partners, and the U.S. Congress still to have passed Trump’s One Big Beautiful Bill (his tax bill), you might of thought we had lost our minds. And yet, that’s exactly what happened.
U.S. equities led the way higher as Iran failed to mount any meaningful retaliation against either Israel or the U.S., easing fears of a broader conflict. President Trump claimed that Iran’s nuclear capabilities had been obliterated, and markets seemed to take him at his word, rallying in response.
Equity Markets
Source: Bloomberg
Fixed income markets also rallied despite the U.S. Congress working to pass a budget that will add around $4 trillion to the U.S. deficit over the next ten years.
Fixed Income Markets
Source: Bloomberg
Easing trade tensions over the quarter provided a slight tailwind for fixed income markets, leading to a modestly rally.
Oil remained resilient over the month as Middle East tensions moderated, while gold drifted sideways as a risk on fervour had investors more focused on equities. Bitcoin had modest gains but was plagued by some volatile swings during the month and quarter.
Meanwhile, the U.S. dollar continued its downward trajectory. This sustained decline is one of the primary reasons U.S. assets have underperformed the rest of the world.
Alternative Investments Markets
Source: Bloomberg
Currency Exchange Rates
Source: Bloomberg
Exchange rate changes have had a considerable impact on portfolio performance this year. Since President Trump’s inauguration, a UK investor would have experienced negative performance in their U.S. equity holdings. Conversely, exposure to euro-denominated assets has provided a relative boost, highlighting the importance of understanding currency exposures within portfolios.
Global Currency Returns
Source: Bloomberg
We believe the current trend for downward pressure on the U.S. dollar is likely to continue. President Trump’s insistence on using tariffs to address the United States’ chronic trade deficit is producing considerable uncertainty for American businesses. Wit the U.S. importing over $3 trillion in goods – now subject to an average tariff rate of approximately 15% that would be subject to tariffs – this represents a huge tax hike for U.S. business and consumers to swallow. The implications are twofold: a potential slowdown in economic growth and upward pressure on inflation, a combination that poses clear risks to the broader economy.
So far it appears U.S. importers successfully built-up inventories before the tariffs took effect. However, the suspicion is that businesses have run down that stock and will now be forced to raise prices. This dynamic is likely contributing to the U.S. Federal Reserve’s (Fed) view that they expect inflation to rise over the coming months, resulting in a reluctance to lower rates until they see how this plays out. The Fed has missed their 2% inflation target to the upside for five consecutive years, so they are perhaps understandably hesitant to lower rates despite recent evidence of a softening labour market in the U.S. President Trump’s open criticism of Fed Chair Powell and his threat to name a replacement before Powell’s term ends in May 2026 is weighing on the U.S. dollar. Currency markets are generally uncomfortable with leaders calling for easier money policies (just see Turkey).
In contrast, the EU and Germany more particularly, are in the early stage of a massive spending initiative to rebuild their militaries and defence capabilities. Germany in addition is devoting significant spending to upgrading their infrastructure as well.
The German Defence Build Up
Source: BMF, Berenberg
The Eurozone has also benefitted from a sharper fall in inflation and has consequently seen more significant easing of monetary policy by the European Central Bank (ECB). Lower rates are helping households and businesses. The recent rise in the Euro has also helped to reduce energy costs. European households still have much of their pandemic savings so the potential for improved consumer spending is high.
China is running an expansive fiscal policy and easy monetary policy which has certainly helped to propel large cap Chinese equities 20% higher this year.
This contrast of a U.S., where economic policy is promoting greater uncertainty and a fear of higher prices with Europe and China pursuing much clearer pro-growth policies will continue to lead to outperformance by the rest of the world as compared to U.S. assets.
Even after its decline so far this year, the U.S. dollar remains rich and with a large current account deficit it’s vulnerable to falling further. Were the Fed to cut interest rates because of a weaker economy or worries over greater political interference by Trump the dollar decline may accelerate.
U.S. Dollar Index
Source: Bloomberg Finance L.P.
In the UK, inflation has climbed back above 3%, reflecting higher labour costs. The increases stem from recent moves by the government to increase the minimum wage and to impose higher National Insurance contributions on employers. In response, the Bank of England has adopted a cautious approach, refraining from lowering interest rates until it better understands the impact of these.
UK Inflation and BOE Base Rate
Bloomberg Finance L.P.
Government spending remains on an upward path leaving longer term UK Gilt yield comfortably (stubbornly) above 5%.
UK 30-Year Gilt Yields
Bloomberg Finance L.P.
Looking ahead, we anticipate maintaining a higher allocation to non-U.S. assets than we have held previously. Our outlook for the U.S. dollar remains bearish, driven by structural and policy-related headwinds.
We also remain cautious on the long end of most government bond yield curves. With expansive fiscal spending becoming increasingly entrenched, we view a steepening of yield curves as the most probable trajectory for interest rates. This reflects both inflationary pressures and the growing supply of government debt.
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Hear more from the Oakglen experts
Our investment team continue to provide interesting and informative content to help keep you in the loop on recent global news and market trends. See below for some key highlights from around the world which some of the investment management team have recently covered:
Read more:
- The NATO Summit at the Hague: Defence Spending Hike
William Lamond, Investment Director (Jersey)
- Central Bank Update: June 2025 – The Summer Snooze
Jeff Brummette, Chief Investment Officer
- Middle East Tensions Escalate: Market and Oil Price Impacts
William Lamond, Investment Director (Jersey)
You can read other articles from the team on our News & Insights page.
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