Market Update – 18th June 2025.

Global financial markets began the week on firmer footing, as investors welcomed a brief lull in geopolitical tensions following heightened fears over the Israel-Iran conflict. Risk appetite rebounded after Friday’s volatility, with sentiment buoyed by hopes that the conflict would remain contained.

However, the relief was short-lived. U.S. President Donald Trump’s call for the evacuation of Tehran and his early departure from the G7 summit dampened sentiment into Tuesday, reviving concerns about escalating tensions in the Middle East. Equity markets lost ground by midday, with investors turning more cautious as they assessed the latest developments. Donald Trump’s absence may put additional strain on NATO discussions at the upcoming summit later this month with tension already among member states.

Despite the pullback, London’s FTSE 100 outperformed its European counterparts, supported by its strong exposure to oil majors, which benefited from elevated energy prices amid geopolitical uncertainty.

While markets remain sensitive to geopolitical developments, recent movements serve as a timely reminder of how quickly sentiment and markets can rebound. Periods of volatility often give way to renewed optimism, underscoring the importance of staying invested and focused on long-term objectives amid short-term uncertainty.

In Asia, Chinese economic data provided a more supportive backdrop. Industrial production rose 5.8% year on year in May, beating expectations, while retail sales accelerated to 6.4%, the strongest pace since December 2023. Consumer demand was buoyed by holiday-related spending around Labor Day and the Dragon Boat Festival, alongside targeted government support, including subsidies for electronics. The figures suggest Beijing’s efforts to cushion the impact of U.S. tariff pressures may be gaining traction.

Attention now shifts to central banks. The U.S. Federal Reserve is due to announce its latest interest rate decision, with no changes expected. Policymakers are likely to hold rates steady amid stable inflation and a resilient labour market, maintaining a cautious stance as they await further data.

In the UK, headline inflation came in at 3.4% in May, in line with forecasts. A decline in airfares, largely due to the timing of Easter and school holidays as well as falling fuel prices helped ease overall pressure. Core inflation, which excludes food, energy, alcohol, and tobacco, dropped to 3.5% from 3.8%, an encouraging sign for the Bank of England that underlying inflation may be softening.

Nonetheless, services inflation remains elevated, a key concern for the Monetary Policy Committee (MPC). The Bank is widely expected to keep interest rates on hold at 4.25% when it meets on Thursday, seeking more definitive evidence that inflation is sustainably returning to its 2% target. Although the MPC has delivered four rate cuts since last summer, the pace has slowed with inflation still above target. The Bank has warned that inflation may rise temporarily to 3.7% between July and September before falling back.

Still to come this week, U.S. initial jobless claims, UK retail sales, and consumer confidence. US markets will be closed on Thursday in observance of the Juneteenth National Independence Day.

Kate Mimnagh, Portfolio Economist