Investor confidence returned during June as European, UK and Japanese equities rallied following a framework agreement between the U.S. and Iran to end the conflict.
European markets climbed to record highs, while the FTSE 100 reached a two-month high as easing geopolitical tensions and falling oil prices reduced concerns around inflation and future interest rate rises.
US: Investors rotate beyond technology
U.S. markets delivered a more mixed performance as investors rotated away from large technology companies and into smaller companies, industrials, healthcare and financials.
This helped the Dow Jones Industrial Average outperform both the S&P 500 and the technology-heavy Nasdaq.
The Nasdaq fell as much as 7% from its record high before recovering much of the decline as investors refocused on companies expected to benefit from continued investment in artificial intelligence.
Government bond markets also rallied as investors reduced expectations for further interest rate rises, signalling growing confidence that inflation may not remain elevated for as long as previously feared.
The Federal Reserve left interest rates unchanged at 3.50% to 3.75% for a fourth consecutive meeting. However, policymakers indicated another rate rise later this year remains possible.
Inflation increased to 4.2% in May, its highest level for three years, while the labour market remained resilient with 172,000 jobs added and unemployment holding steady at 4.3%.
Japan: Strong gains as geopolitical risks ease
Japanese equities were among the strongest performers during the month.
Falling oil prices following the U.S.-Iran framework agreement reduced inflation concerns for Japan’s import-dependent economy and helped support investor confidence.
The improved global backdrop also boosted technology companies as demand linked to artificial intelligence remained strong.
Alongside Europe, Japan benefited most from the improvement in global sentiment as investors moved back towards international equity markets.
China: Signs of slowing economic momentum
China’s economy showed signs of slowing after a strong start to the year.
Retail sales fell by 0.6% in May, marking the first monthly decline in more than three years. Fixed asset investment also weakened, falling 4.1% during the first five months of the year.
Industrial production growth slowed, while domestic demand and the property market remained under pressure despite continued resilience in exports.
These developments reinforced concerns that China’s recovery remains uneven and continues to rely heavily on external demand.
Europe: Record highs despite weaker economic growth
European equities rallied strongly and reached record highs as investors welcomed the prospect of a lasting reduction in Middle East tensions.
Despite improving market sentiment, the European Central Bank raised interest rates for the first time since 2023, increasing its main deposit rate from 2.0% to 2.25% in response to rising inflation.
Eurozone inflation increased to 3.2% in May, while the region’s economy unexpectedly contracted by 0.2% during the first quarter, reflecting weaker output in countries including Ireland and France.
Markets currently expect further interest rate increases over the coming months.
UK: Markets remain resilient despite political change
Political developments had little impact on UK markets despite Prime Minister Keir Starmer announcing his resignation, paving the way for Andy Burnham to become Prime Minister.
The Bank of England kept interest rates unchanged at 3.75% after inflation remained at 2.8% in May.
Although concerns remain around inflation, the Bank lowered its forecast, expecting inflation to peak at just over 3.25% later this year.
Consumer spending improved during May and confidence appears to be recovering, although pressures on household finances remain.
The labour market also remained relatively stable, with unemployment edging down to 4.9%, although job vacancies fell to their lowest level for five years.