June 16th, 2025 - Is a turbulent summer ahead of us ?

After a rollercoaster first half, investors would be looking forward to a few weeks of relative calm in the markets, while they sip their cocktail on a beach or enjoy a hike in the mountains, whatever suits best. The latest developments in the Middle East, as well as Trump just being himself do not leave much hope for this. Not only are we getting closer to a major escalation of the military conflict between Israel and its neighbors, which could drag the US into it, but also the political situation in the US is getting from bad to worse. The recent demonstration of power by Trump, who sent the National Guard to quench the protests in L.A. as well as the large military parade on Saturday for the 250th army anniversary (which coincided with his birthday) do not provide any basis for feeling relaxed in the short-term.

And no real progress has been made on the tariffs front, with the major trade partners. The meeting between China and the US in London last week practically took place to confirm and sign the Geneva agreement, which still imposes a 55% duty on Chinese imports on top of the existing 25% since Trump's first term. The July 9th deadline for the EU and the US to agree their trade terms is just three weeks away and both parties mentioned last week that negotiations are not really leading anywhere. Trump said that no extension of the deadline would be necessary, obviously meaning that if negotiations fail the previously announced huge tariffs will be in effect, the next day.

Equity markets are discounting a sunny summer, with all above issues to be resolved smoothly. Or in other words, current valuations imply that the extra tariffs threat will disappear, inflation will move lower, the US economy will rebound strongly and the existing 10% tariffs will neither hurt operating margins nor affect consumer prices, and world peace will be established. We do hope that things during our summer evolve like this. But we also fear that a very rosy scenario is already in the prices and the market upside is rather limited from current levels, especially during the low-volume, treacherous summer months, as recent history has shown.

The FED's meeting on Wednesday is definitely going to attract attention, at this critical juncture. As we have noted before, the FED has a dual official mandate, that of full employment and inflation below or at about 2%. With unemployment currently at multi-year lows but slowly rising and consumer prices having fallen to little above 2% but now being threatened by tariffs and perhaps an oil price shock, the FED will soon find itself facing the dilemma of either letting inflation run away or the economy to fall in a recession, as it would be unable to fight both fights at the same time. For now, the bond market has been betting on the FED re-commencing soon its cutting rates campaign, as the economy is showing signs of slowdown and inflation appears to be in check. Last week's data corroborated this view.

The US labor market showed again signs of weakness. The weekly jobless claims remained elevated at almost 250k for a second week in a row, while the continuing claims jumped to 1.95mn, the highest since 2021. Other metrics, such as new hirings or job listings continued to make new lows for this year and seem to be in a clear downtrend, albeit at not a steep rate yet. The monthly nonfarm payrolls came in at 139k in May, slightly higher than expectations, but prior months were revised down by a cumulative 95k. The unemployment rate remained at 4.2%, which is low in absolute terms, but it is also on an uptrend from the 3.5% low of this cycle.

The US May CPI report was a touch better than expected. The headline inflation was announced at 2.4%, higher than the 2.3% of the previous month, but less that the 2.5% of forecasts. The core inflation which excludes food and energy, remained unchanged at 2.8%, vs forecasts for a small rise to 2.9%. We should also note that the data on border tax collection of the previous month showed a sizable increase, of about 10bn$, which is of course due to the tariffs that have taken in effect. One reason which explains why companies are not increasing prices yet, is that importers rushed to bring in merchandise in the the first quarter of this year, in anticipation of what is coming. But it could also be the case that lackluster demand and small pricing power has led to companies paying these duty taxes to the US government, protecting their sales, but hurting their operating margins. Either way, this spells trouble, either inflation will rise or companies' earnings will be hit.

Global equities corrected last week, having rallied significantly from the early April lows. US markets fell by 0.5% on average, whereas Europe underperformed with its main indices falling more than 2.5%. In Asia, the Hang Seng index managed to eke out a small gain (+0.3%) as did Japanese equities, but these markets were closing as news about the airstrikes in Iran broke out in early European morning. In terms of sectors, Energy managed to finish positive (+1.5%), a performance which came primarily on Friday as oil prices spiked by almost 10%.

Bonds moved higher, as the combination of benign inflation, mediocre US jobs data and the airstrikes was enough to cause buying. The US 10-yr yield fell to a low of 4.30% before slightly rebounding to 4.40% as the oil prices spike caused concern for higher inflation ahead. The German equivalent is trading around 2.50%.

Gold was the beneficiary of the turmoil , rising closer to 3500$ again. An interesting report came out from the ECB last week, according to which gold has become the world’s second most important reserve asset for central banks, overtaking the EUR. The yellow metal accounted for 20% of global official reserves last year, leaving the euro behind at 16% and second only to the USD which still accounts for 46%. This is attributed to central banks continuing to accumulate gold at a record pace, as the ECB wrote, adding that central banks for the third year in a row acquired more than 1'000tn of gold in 2024, a fifth of the total global annual production and twice the annual amount in the decade of the 2010s.

Chart of the Week : The USD is following the same pattern as during Trump's first term.

The EURUSD briefly broke above 1.1600 last week before the "flight to safety" due to the middle east tension, brought buyers back. In early December of last year, during our quarterly investment committee, we dared to challenge the consensus of a strong USD as the market believed that Trump's pro-growth and "animal spirits" policies will lead to an even stronger dollar in 2025, at a time when the EURUSD was trading below 1.0500. Our concern with this view was primarily based on the fact that the high US debt and fiscal deficit, coupled with the aggressive stance of Trump against its allies (and creditors) will make international investors reduce their US holdings (equities and bonds), consequently selling the currency. We also pointed out the fact that during Trump's first year (2017) the USD sold off significantly and the EURUSD reached a high of 1.200, having been closer to 1.0500 when he won the 2016 elections. Fast forward six months, and the EURUSD is tracking the 2017 projectile with striking similarity ! Forecasting FX moves in the medium-term appears to be a futile exercise and very few if any have successfully done so, consistently. We are not one of them. But if we had to pick a direction with a gun on our head, we would probably chose to bet that this downtrend for the USD will continue for the most part of this year and perhaps extend into the next.

Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

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• Sources: Chart of the Week : KSH/FactSet