Market sentiment has remained relatively calm in June. The rise of equity markets has, however, paused, and there has been no major movement in interest rate levels over the past month.
The equity markets have been on the rise since the easing of the tariff situation in April. Recently, there have been no major changes in the interest rate levels. However, the dollar has shown major movement, continuing its depreciating trend of the early year. The euro-dollar exchange rate broke through the 1.15 level towards the end of the week.
The escalation of the situation between Israel and Iran at the end of last week rattled the markets, causing a drop in equity prices and a rise in oil prices. In recent years, markets have generally calmed down quickly after an escalation, but if the conflict intensifies, markets can be affected, particularly through oil prices. One key aspect for the market is also how the USA deals with the situation.
Media coverage of the trade war has declined in recent weeks, and headlines about it have become more positive. Sentiment among retail investors has clearly improved, even though tariffs in the US remain at historically high levels. This is also evident in consumer surveys, according to which consumer confidence is recovering and consumers’ inflation expectations have somewhat declined.
However, figures measuring retail and other economic activity, often considered as “hard data” on consumer confidence, show no significant changes as of yet. It is still too early to conclude that the tariffs will have no long-term impact on consumer confidence.
Tariff decisions have gone back and forth during the spring, and some have been postponed. At present, it is difficult to predict the level at which tariffs will finally settle, but they will most likely remain at a significantly higher level than at the beginning of the year. As a result, they will likely have some negative impacts, at least in the longer term, although it will take a while for this to be reflected in the economy and price levels.
There have also been sharp swings in economic growth expectations during the spring. The decline in growth expectations in the USA now seems to have stopped, but the fluctuations in the labour market continue.
Inflation has been surprisingly low in the USA for several months now, and in Europe inflation has already dropped to 2%. Just a few weeks ago, the market consensus was that US inflation would pick up as a result of the changes in tariff policy. This has not been the case so far, however, and the situation has been almost the opposite. With the data available, it may still be too early to tell what the price levels in the US will be like in the longer term, as the effects often show up in the data with a delay of a few months. It is indeed very likely that the tariffs will have inflationary effects at some stage.
Market expectations for the US Fed to lower its key interest rate have increased. In fact, markets are currently expecting the central bank to cut interest rates twice this year, instead of once. More details on the Fed’s monetary policy will be available this week, when the central bank publishes its interest rate decision on Wednesday 18 June. A rate cut is unlikely, but the Fed’s communication should provide the market with some additional information.
Mandatum’s market review will take a break for the summer and return August. We wish you a great summer!
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