Anthony Willis
Senior Economist, Multi-Asset Solutions team
Top stories
- The US Federal Trade Agency proposed the introduction of a swathe of new tariffs of between 10% and 12.5% covering 60 countries. These would in effect replace those tariffs introduced since ‘Liberation Day’ in April 2025 that were subsequently ruled illegal by the US Supreme Court. The UK, Canada, Mexico, the European Union and Taiwan would see the lower 10% rate imposed, while other major economies including China, India, Japan, South Korea, Brazil and Switzerland would face the 12.5% rate (see Market Movers).
- The US-Iran conflict was never far from the headlines this week, with strikes carried out by both the US and Iran – albeit at an intensity that suggests neither side wants to fully break the ceasefire that has been in place since 8 April. Helped by repeated suggestions from President Trump that a peace deal was close, the oil price fell by 19% last month. However, it gained some ground this week on concerns over the fragility of the ceasefire and lack of concrete progress towards a peace deal. Brent Crude is trading at $94.71 (as of 5 June), up 56% on the start of the year. Last Thursday, the US and Iran agreed a ‘memorandum of understanding’ that would extend the ceasefire for 60 days and see talks begin on the future of Iran’s nuclear programme. While that helped sentiment, this week has seen Trump looking for further edits to the draft text, while Iran was reported by state-affiliated news agencies to be halting indirect talks with the US because of what Iran sees as a breakdown of the ceasefire in Lebanon.
By the numbers
- 3.2% – the year-on-year level of eurozone CPI for May, up from 3% in April – the highest level since September 2023. Core CPI climbed to 2.5% year-on-year from 2.2% in April. While markets are fully pricing an interest rate hike from the European Central Bank next week, the contrast with the previous energy shock in 2022 is notable. In Back then, CPI was already 4% when the energy shock began, with the first rate rise coming in July 2022, by which time CPI was 8% year-on-year and policy rates were -0.5%. The current policy rate is 2%. Eurozone CPI is expected to remain in a 3%-3.5% range for the rest of the year, before easing to 2.5% in March 2027 as the current spike in energy prices falls out of the year-on-year data.
Market movers
- Although tariffs were back in the headlines, the market reaction was muted. There has always been an expectation that the US would find a suitable longer-term mechanism to replace the “quick fix” blanket 10% tariff introduced earlier this year after the US Supreme Court ruled the ’Liberation Day’ tariffs from 2025 to be unlawful. These new tariffs fall under Section 301 of the 1974 Trade Act and will come into effect only after a public consultation and review period. The 10% global levy, introduced under Section 122 of the Trade Act (and deemed illegal but in place under appeal), is due to expire on 24 July. What it means for the global economy is continuity, and with supply chains and trading relationships having evolved notably over the past 12 months, the impact should be minimal. The cost will continue to fall on US companies and consumers, who Federal Reserve research showed are taking the brunt of Trump’s trade policies.
The investment lens
- Priced for perfection? The strength in global financial markets over recent months is impressive. Worries over geopolitics have been put to one side as strong earnings and renewed optimism over the AI theme have driven indices in the US and Asia to record highs. Other indices have seen positive – albeit more muted – returns, not least in regions with higher energy dependency. The S&P500 index has seen nine weeks of consecutive gains and is up 16% in two months. Historically, such returns have only been seen coming out of a recession or before a major crash. And it’s not just equities – in credit, spreads are at or close to historical tight levels. This has all happened against a backdrop of a looming energy crisis, with the Strait of Hormuz now closed for three months. But the oil price is well off recent highs, albeit considerably higher year-to-date.
- The backdrop is one of heightened tail risks, but only sovereign bonds are showing any signs of ‘fear’ right now. Market expectations of an imminent ‘fix’ for the Strait of Hormuz appear to be keeping a lid on oil prices and are likely helping wider sentiment. But some caution is warranted – the US appears more impatient for a deal than Iran, whose ability to continue to export substantial amounts of oil despite the US blockade means their economy is still receiving significant revenues. Meanwhile, the US and other nations are slowly drawing down the oil inventories that so far have allowed supplies to continue and prevented oil prices shifting higher. But those inventories will not last forever, so either a resolution to the conflict, or at least the Strait of Hormuz, needs to be found, or this period of strong returns and market resilience will come under pressure.
