The US military strikes on Iran’s nuclear facilities raised tensions in the Middle East to a new level. President Trump called for Iran’s unconditional surrender, but that seemed unlikely. Iran responded defiantly by threatening strikes on US targets or the shutdown of the Strait of Hormuz. Israel continued its heavy strikes on Iranian targets and threatened to eliminate Iran’s leaders.
Market reactions to these events were surprisingly minor. On June 23, the Monday following the strikes, changes in the principal markets ranged from -0.5% to +0.2%. Changes in interest rates and currencies were also minimal. The price of crude oil had already risen sharply from 65 to over 80 dollars a barrel earlier in June, and the price no longer reacted following the US attacks.
The calmness of the markets may be down to assessments that Iran has few supporters and to the credibility of its ultimatums. Iran’s retaliatory attack on the US airbase in Qatar was weak. The situation in the Middle East remains tense, however, and may lead to new developments.
Uncertainty is here to stay
The United States still has no major trade agreements. The rare earth export agreement with China was a continuation of the framework established in Geneva in May. Trump’s deadline is approaching, but the US and the EU have failed to reach a solution worthy of announcement that will satisfy Trump. There is also significant uncertainty surrounding US tax policy and the current budget proposal, with neither likely to be approved before August.
The International Monetary Fund (IMF) and the World Bank have both revised their global growth forecasts downward, citing both trade disruptions and a slowdown in the US economy as key factors. There was clear evidence of this in May, when US retail sales contracted by 0.91%.
Employment figures for May were undoubtedly moderate, with the unemployment rate remaining stable at 4.2%. Despite this, nearly a million people were made redundant over the past month, which is a new record for an economy not in recession or in crisis. The number of long-term unemployed receiving benefits rose to its highest point in roughly four years.
The Fed kept its policy rate unchanged at its June meeting, which infuriated President Trump again. Market expectations regarding monetary policy remained largely stable and the Fed is expected to cut its interest rates in September and December, again by 0.25 percentage points. Somewhat unexpectedly, the central banks of Norway and Switzerland both cut their interest rates in June.
Increasing pressure on corporate profit margins
The Institute for Supply Management (ISM) survey indicated that there has been not only a slowdown in sales growth but also continued increases in raw material and service costs for companies. The increase in the Producer Price Index (PPI) also exceeds that of the Consumer Price Index (CPI), which suggests that businesses are absorbing some of the cost increases rather than passing them on to consumers. A survey by the Fed indicates that only about half of businesses passed on more than 50% of their increased tariff costs to consumers, which suggests that businesses are absorbing a sizable portion of the cost burden through their profit margins.
Most equity markets slipped into slightly negative territory in June. The Helsinki Stock Exchange portfolio index has increased by 10% since the start of the year, while the MSCI Europe index has risen by 5% and the MSCI China index has increased by 4%, all in euro terms. Conversely, Japan’s market decreased by 5% and the US market by 8%, in euro terms. The dollar continued to weaken against the euro in June. The dollar has weakened by 12% since the beginning of the year.
Figure: Price of crude oil is now lower than it was a year ago
