Market Overview

Summary of world markets in June

Turbulence in the Middle East continued to dominate markets, driving volatility in oil prices and causing fluctuations in inflation expectations and global risk appetite. Sentiment improved as the US and Iran moved closer to an interim peace deal, but global equities still ended the month slightly lower. AI-related equities were volatile as investors assessed the sustainability of the semiconductor super-cycle and questioned the future value of the hyperscalers’ capital expenditure. Sovereign bond yields eased as the fall in oil prices dampened inflation concerns.  UK gilts and sterling were relatively steady following Prime Minister Starmer’s resignation announcement.

UK equities gained modestly, underperforming their European peers due to the drag from the oil & gas, basic materials and precious metals sectors. The lack of technology hardware players was also a relative headwind. On the other hand, the travel & leisure and other consumer-orientated sectors were given a boost from lower fuel costs, while more defensive sectors, such as utilities, were also favoured. After a run of good recent performance, mid- and smaller-cap indices underperformed last month.

In the US, as mega-cap technology stocks suffered a pullback, the broader market benefited, as evidenced by the equally weighted main index outperforming the market-cap-weighted main index. Also noteworthy was that the main value index reached an all-time high; furthermore, small-cap indices have been performing well. The technology sector continued to be in focus and experienced high volatility. Enthusiasm for semiconductor stocks remained, but it was a bumpy ride. On the other hand, the largest hyperscalers came under renewed scrutiny, given the breathtaking scale of AI-related capital spending. June was also marked by the listing of SpaceX, which was the largest IPO in history. Elsewhere, sector rotation saw the likes of financials, industrials and healthcare outperform. Sentiment was bolstered by economic data that pointed to continued resilience, despite elevated inflation pressures.

The broad European index was a leading performer this month, with sentiment boosted by the fall in oil prices and easing inflationary pressures, as well as improving earnings expectations. The strongest sectors were technology hardware, financials and pharmaceuticals, while at the other end of the scale, software companies continued to struggle, along with commodity, aerospace and defence companies.

Japanese equities advanced, although returns in sterling terms were diminished by the weakness of the currency. As in other markets, the AI theme was dominant, with semiconductor stocks making strong gains, but with high volatility. Indeed, this pattern was repeated in Asian markets more broadly, as the share prices of semiconductor and memory names saw some roller-coaster moves. Following surges in Taiwan and Korea in recent weeks, both markets delivered only modest gains in June. There was notable weakness in Chinese equities, where the domestic economy remains in the doldrums. In emerging markets, South Africa also declined on the back of further weakness in gold and base metal prices. Overall, Asian and emerging market indices slightly underperformed developed market indices.

Style-wise, with parts of the technology segment under pressure and evidence of investors rotating into other sectors, value strategies tended to outperform in June.

It was a busy month for central bankers. Under its new chair, Kevin Warsh, the Federal Reserve held interest rates steady in the 3.5%–3.75% range but signalled possible hikes ahead due to persistent inflation and the resilient labour market. The Bank of England also maintained the base rate at 3.75%, with Governor Bailey noting that the fall in energy prices was helping to dampen inflation expectations. However, the European Central Bank elected to raise rates by 0.25% on the back of ongoing inflation pressures, and the Bank of Japan moved its benchmark rate up to 1%, the highest since 1995, in an ongoing normalisation of monetary policy.

Government bonds posted modest gains as yields moved lower in response to positive developments in the Middle East and the lower oil price. UK gilts delivered modest positive returns, despite the added uncertainty of an upcoming change of Prime Minister following Keir Starmer’s resignation. Andy Burnham, the likely successor, provided some reassurance to markets by emphasising a commitment to the UK’s fiscal rules.

The total returns from corporate bonds broadly kept pace with those of their sovereign counterparts, although they struggled to make firm gains given that credit spreads are already very tight.

The oil price tracked lower over the month as the US and Iran inched towards an interim peace deal. Brent crude fell by almost 40% over the quarter, the largest decline since the pandemic slump of 2020. Even so, on a year-to-date basis, the oil price is still almost 20% higher.

The gold price peaked in January and has been falling since then, as the Iran conflict ushered in fears of higher interest rates in response to inflationary risks. The stronger US dollar has added to the pressure on precious metals. There were signs of stabilisation towards the end of the month, aligning with receding fears about forthcoming rate hikes.

The US dollar continued to strengthen, but it was the Japanese yen that once again caught investors’ attention. The currency has plumbed 40-year lows, even as government bond yields have been rising. This has occurred amid growing concerns about increased fiscal spending and heavier government borrowing.