Geopolitics, Rate Cuts, and a Falling Dollar: A Review of a Tense June
June 2025 was a month marked by significant geopolitical events, divergent central bank policies, and notable movements in currency and commodity markets. A monthly market review from Mercer for June 2025 sheds light on these key developments and their impact on the global financial landscape.
Key Global Events in June
The month was dominated by several key events:
Middle East Tensions: Geopolitical tensions in the Middle East escalated, with Israel and the US launching a military strike on Iran following failed negotiations over its nuclear program. A ceasefire was subsequently announced by the US and remains in place.
Oil Price Volatility: Crude oil prices surged by 23.4% to US79abarrelafterthemilitarystrikesbutfellbacktoaroundUS67 following the ceasefire, ending the month with a 5.8% gain.
Central Bank Divergence: The US Federal Reserve kept interest rates steady at 4.25-4.5%, while the European Central Bank (ECB) cut its deposit rate for the eighth time to 2%.
US Dollar's Historic Slump: The US Dollar experienced its worst half-year performance since 1991, falling another 2.5% in June. All other major currencies strengthened against the USD during the month.
Australian Economic Landscape
Australia's economy continues to show signs of subdued growth.
GDP: The country's Q1 2025 GDP remained steady at 1.3%, which was weaker than expected and below its long-term trend. This was partly due to the impact of Cyclone Alfred and continued weak household spending.
Inflation: Australian CPI for May dropped to 2.1% from 2.4% in April. With inflation now near the lower end of the RBA's 2-3% target band, the likelihood of a July interest rate cut has increased.
Labor Market: The Australian labor market has remained resilient, with the unemployment rate holding at 4.1% in May.
Market Performance Highlights
Despite the geopolitical turmoil, many asset classes performed well in June.
International Shares: International shares (hedged) rose by 3.8%. Emerging market shares (unhedged) outperformed, gaining 4.1%, with the Korean share market being a notable performer.
Australian Shares: Australian shares were up 1.4% in June. The energy sector led the gains with an 8.9% return following the military strike on Iran.
Fixed Interest: Fixed interest markets also saw positive returns. International government bonds rose by 0.7%, and international credit gained 1.3%. Australian government bonds were up 0.8% for the month.
Outlook and What to Watch
Looking ahead, there is a moderately negative outlook on growth assets. This is due to concerns that US tariffs will impact economic growth and that corporate earnings may be underestimated by the market as companies withdraw their forward earnings guidance. A mild recession in the US and a global slowdown are considered likely.
Key events to watch in July include:
US unemployment data.
The end of the 90-day delay for the implementation of US reciprocal tariffs on July 9th.
Australia's Q2 2025 CPI data release on July 30th.
Reference
Mercer. (2025). Monthly market review - June 2025. Mercer Investments (Australia) Limited.
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