Market Monitor | Mid-Month Update
Headlines and Highlights
- Israel-Iran conflict rattles markets initially, raises risks: Hostilities erupted between Israel and Iran that jolted world markets and sent oil prices sharply higher before Iran signaled a desire to end the fighting. The conflict began last Friday when Israel bombed nuclear and military facilities in Iran and Tehran retaliated with missile attacks. Global stocks briefly fell 3% and oil prices surged 10% on investor fears of a broader Middle East war, while remaining lower overall for the year. At mid-month, the S&P 500 was up 1.2% in June and 2.2% year-to-date while the benchmark for international developed stocks was up 17.9% in 2025.
- U.S., China ease economic tensions: U.S. and Chinese officials negotiated a framework that the White House said should restore a trade truce and de-escalate economic hostilities. The reported agreement came following two days of intensive talks in London and lowered the temperature on the trade war that remains unresolved between the world’s two biggest economies. Under the reported terms, China would resume rare-earth exports and pay 55% tariffs and Chinese students would be able to attend U.S. colleges and universities.
- Dollar drops to 3-year low: The dollar fell to its lowest level since March 2022 as the tariff standoff between the United States and other countries continues to weigh on demand for U.S. assets. The greenback has sunk 10% year-to-date against a basket of other leading currencies, with more than half the drop occurring since the April 2nd rollout of global “reciprocal” tariffs. Some foreign investors, who make up a third of Treasury holders, have been selling them. The dollar’s drop has contributed significantly to outperformance by international stocks in 2025.
Chart of Interest
Key Takeaways
- The outbreak of Middle East hostilities has elevated geopolitical risks for investors. Any escalation of the fighting that prompts Iran to shut down the Strait of Hormuz would threaten global oil supply, as 20% to 30% of the world’s crude passes through the narrow waterway. But Tehran indicated it wants the stand-off to de-escalate. Initial volatility from such events historically has been short-lived.
- The world economy has been mostly resilient in the 2½ months since President Trump initiated a broad global trade war, but tariffs dim the future outlook. Growth is now projected to slow to 2.3% in 2025 from 2.8% last year, according to a sharply downgraded estimate by the World Bank. The international organization says the global economy is now on track for its weakest decade since the 1960s in a period that also has been slowed by the global pandemic, policy uncertainty and a continuing growth slowdown in developing economies.
- Consumer sentiment rebounded in early June as tariff anxiety eased – the first increase this year in the University of Michigan’s index – in a reflection of U.S. resilience. While retail sales declined 0.9% in May, heavy consumer spending has helped keep the economy robust: GDP is expanding at a 3.8% annual pace in the second quarter, according to the Atlanta Fed. Sentiment and spending both are likely to cool if tariffs ultimately settle at a high level, however.
- Inflation was relatively tame in May as gauged by both the consumer price index and the wholesale producer price index, which edged up to 2.4% and 2.6%, respectively. Tariffs are almost certain to push inflation at least temporarily higher in the months ahead. The Federal Reserve is unlikely to lower interest rates at its meeting this week given that tariffs may still impact near-term inflation reports. The next rate cut will likely come at the September Fed meeting.
- Trade negotiations between the United States and multiple other countries over the past couple of months have produced only one newly announced deal on tariffs, with the United Kingdom. The slow pace of talks increasingly raises the likelihood of some higher tariffs being imposed when the Trump administration’s July 9th deadline for concessions passes.
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