June closed with gains, especially in the US and emerging markets (MSCI Emerging Markets +6%), and declines in the European market. Fixed income was slightly positive in the various local currencies.
- S&P 500: +4.96%.
- Nasdaq: +6.27%.
- Stoxx Europe: -1.33%.
- All Country World Index EUR: +1.14% (the dollar fell 3%, so in dollar terms the rise is 4.14%).
- Global Fixed Income Index EUR: -1.46% (the dollar fell 3%, so in dollar terms the gain is 1.54%).
So what has happened to cause this distortion?
First of all, from the beginning of the year until the end of May, the S&P had risen by 0.51% and the European index by 8%, therefore, what has happened is that the American and European markets have become more balanced. From the beginning of the year to the end of June, the S&P has risen by 5.50% and the European index by 6.65%, while emerging markets have risen by 15%.[1]
Great, but why?
– United States: Optimism in view of the Trump administration’s negotiations with China regarding rare earths[2], of which Beijing controls 70%, and good inflation data despite the fear of tariffs, which, at least so far, do not seem to have had any effect.
– Europe: Pessimism ahead of tariff negotiations between the European Union and the United States.
– Emerging markets: A lower dollar benefits them, along with less trade tension with the United States.
It should be added that the best-performing sectors in June were technology and artificial intelligence, with greater weighting in the US and emerging market indices than in the European indices. To comment at a later date on Europe’s capacity for technological innovation.
Therefore, there seems to be a sectoral and geographical rotation from sectors that had performed well, such as energy and financials (with greater weight in European Indexes) to sectors that had performed worse. All this thanks to what is being called in the financial markets, TACO (Trump Always Chickens Out[3]), i.e., he announces with great fanfare the aggressive tariffs and then backs out, out of cowardice? to negotiate? Who knows.
With respect to fixed income, excluding the dollar effect, all segments were up slightly. The downward revision of first quarter GDP and the cooling housing market fueled bets of two rate cuts by the Fed this year. Rates fall, prices rise.
With respect to fixed income, excluding the dollar effect, all segments rose slightly. The downward revision of first quarter GDP and the cooling housing market fueled bets for two rate cuts by the Fed this year. Rates fall, prices rise.
There are several aspects that are important to highlight from June.
- Why did the market not suffer from the US attack on Iran or the retaliatory missile launch by a US military base in Qatar?
The truth is that the market’s reaction has been surprising. One of the risks perceived in the face of this tension is the rise in oil prices. A sharp rise in oil prices has a significant impact on global inflation. As we can see in this chart of the oil price since the beginning of June, there is a sharp rise on June 19 of 22% even before the US attack on the Iranian nuclear bases. But immediately afterwards, it plummets by almost 15% and stabilizes.
Oil prices fall even with the risk of closing the Strait of Hormuz, which Iran controls and through which 20% of the world’s oil production passes, and which is distributed around the world, as can be seen in this image.
Source: Us Energy Information Administration.
I believe that the reasons why the price of oil has stabilized are i) the low probability of closing the Strait of Hormuz in view of the possible unrest of its “partners” China and Russia, ii) low world demand and iii) accumulation of inventory prior to this crisis.
All this unlike what happened in the 1973-74 oil crisis, which did provoke a strong crisis. The difference lies mainly in the fact that there are now more energy sources and American energy independence.
- The dollar fell 3% in June.
Could this be the beginning of a change in the world’s reserve currency? I do not think so, maybe later, but it will not be in the short term. There are still a lot of dollar operations and the United States today has the main characteristics to have a strong currency.
Borrowing a list from Macquarie… Victor Shvets, a global currency and its issuer[4]:
It is still the world’s reserve, but with some deterioration provoked again by the politicians of the moment.
- It must be convertible and have no capital controls. (The euro and the yen also meet these requirements, but the yuan does not).
- There should be a current account deficit to deposit sufficient funds in foreign hands. That excludes all but the dollar.
- It needs a deep and liquid pool of assets; at this time only the United States qualifies.
- It needs secure, easy-to-use settlement systems; SWIFT is the basis of the dollar’s hegemony, “with no one else even coming close.”
- It must have strong and reliable internal institutional pillars, with consistent rules-based policies. This is where the US is failing; for all its shortcomings, the EU is more of a rules-based order.
- It must respect global norms and rules, another area where the United States is weakening.
- Have stronger than average economic growth: an advantage for the U.S. over the EU and Japan.
Clause 899 of the “One Big Beautiful Bill”, nicknamed “retaliatory tax” (what a name for it) gives the Secretary of the Treasury the right to raise federal taxes (withholding taxes on dividends, interest and other payments) on taxpayers linked to “offending countries” that impose “discriminatory” taxes on the United States. The immediate consequence is a decrease in investment in U.S. assets and, therefore, a fall of the dollar.
This chart shows how the dollar measured against a basket of currencies of the rest of the world has fallen sharply this year.
Was this Trump’s intention to balance the trade deficit? For me it is not the most appropriate, the best thing is to have better quality products and they will be demanded by the rest of the world. I know it is not that simple, but I think that trying to lower the dollar in this way generates internal inflation whose affected are the American citizens themselves.
It has important implications for investment because if you invest in U.S. assets you have two sources of return, that of the asset itself and that of the dollar. For example, if you buy an American company at $100 and the profitability this year is 12%, in principle you will be happy, but as soon as you convert it to euros, the fall of the dollar makes the total profitability -2%, then we are not so happy, are we? Be careful with this.
The volatility of the dollar against the euro is not usually so high, this year it is so because of the uncertainty generated by the Trump administration.
- The inflation forecast as the source of the Fed’s decision whether or not to lower rates.
Donald Trump is pressuring Jerome Powell to lower rates so that the financial cost at the federal level does not skyrocket. As I said before, the financial cost of debt is higher than defense spending. For example, I leave you a message that Trump wrote in his X account to Powell.
This image shows the different interest rates that these countries have. The United States appears in the 35th position. Trump writes in the upper right margin that the United States should be among the first and throughout the image he says textually:
As usual, you are late. “Too late! You have cost America a fortune – and continue to do so – You should lower the rate, and a lot! Hundreds of billions of dollars lost. no inflation!
Regardless of the forms, he justifies his push by the more stable inflation at levels of no concern and how the tariffs have not caused inflation to rise. It is true that the May figure was 2.4% year-on-year vs an expected 2.4% but a slightly more detailed reading as I show in this image from the analysis firm Strategas,[5] the index that captures the most common expenses of a normal person is higher than their wages.
The Fed is not entirely comfortable in lowering interest rates because it does not know what decisions Trump will make on tariffs and how it will impact inflation. Is it prudent? Most likely but time will tell.
The uncertainty that generates the future we cannot control or perhaps it is better that way because it sharpens our wits. This ingenuity together with experience and analysis are necessary to minimize that uncertainty. In addition, the actions of many politicians increase this uncertainty, making forecasting more difficult. Therefore, a good analysis of the assets in which we invest is necessary to avoid the negative effects of unfortunate decisions. As Don Quixote de la Mancha used to say, “The enchanters may take away my fortune, but the effort and courage will be impossible for them.”
[1] MSCI Emerging Markets.
[2] They relate to 17 key metallic chemical elements for the automotive, industrial, defense, petroleum, and healthcare industries.
[3] Coined by journalist Robert Armstrong. In Spanish, “Trump always chickens out”.
[4] John Authers (Bloomberg)
[5] He constructs an index that he calls common man’s inflation, i.e., it takes into account food, energy, housing, clothing, utilities and insurance.
