Despite the escalating geopolitical tensions between Israel, Iran and the US, equity and bond markets are – for now – not pricing in a worst-case scenario. In this context, a diversified allocation is warranted to contain tail risks and mitigate mounting volatility. Gold continues to serve as a hedge against extreme shocks.
Market recap
Beyond the numbers
Macroeconomics
The crisis in the Middle East is intensifying, as the United States gets involved in the conflict and targets Iran’s nuclear sites. Tail risks and uncertainties have increased, depending on how the conflict in the region evolves. The most negative scenario would be the closure of the Strait of Hormuz and oil prices (Brent) reaching the USD 100–130 range. Nevertheless, this scenario still looks distant and given contained reactions on the markets, our base-case scenario remains valid, but at risk.
The US economy slowed more than expected in May, with declines in industrial production, retail sales and housing starts, thus validating the soft-landing scenario. While maintaining the status quo on interest rates, the Fed revised its inflation forecasts upwards (core PCE at 3.1% in 2025 and 2.4% in 2026) and growth forecasts downwards by -1.4% and -1.6% (2025 and 2026, respectively). The prospects of rate cuts are limited in the short term in the US, but the Fed’s dot plot points to two cuts in the second half of this year. As expected, the Swiss National Bank (SNB) decreased its key rates to 0%, while the Bank of England did not adjust its strategy, despite a fall in inflation to 3.4% year-on-year.
This week, we will be monitoring the release of industrial sentiment indices (PMI) in Europe and the United States, which are likely to decline due to mounting risks.
Asset allocation: strategic views as at June 2025
Equities
Global equities ended last week modestly lower (-0.4%), but with regional divergences: the US decreased by -0.1%, Europe declined by -1.6%, and emerging markets rose by 0.1%.
Relative US strength was upheld by the technology sector (+0.8%) which is benefiting from upward earnings revisions. This trend supports the overall outlook for US earnings, given the sector’s significant weight in major indices, as technology and the Mag7 together represent 44% of the S&P 500. In contrast, European equities are registering downward revisions with the region less insulated from the global macro slowdown and negatively impacted by the EUR’s strength, which explains their recent underperformance of -2.1% since the start of June vs. the US’s +1.1%.
We upgraded our conviction level on the energy sector from 2/5 to 3/5 in light of US military intervention in the Middle East and a potential supply disruption risk. We also upgraded our conviction level on the utilities sector from 3/5 to 4/5, as a pickup in power prices in the near term should lead to earnings upgrades in addition to the sector’s immunity to macro risks.
Along with the geopolitical developments, markets will also turn to US macro data this week to gauge the health of the US economy and what that means for corporate earnings where we see current Q2 estimates as potentially too low.
Global equities slipped (-0.4%): US tech led energy and utilities due to rising risks
Fixed income
Fixed income performed well last week, with Treasuries, investment grade and high-yield each up by 0.2%. On a month-to-date basis, investment grade is up by 0.5% and high-yield by 0.9%.
The Fed held rates at 4.25–4.50%, with the Fed’s official projection for the fed funds rate (the dot plot) projecting two cuts in 2025 but only one in 2026 (down from two previously). Trump pressed Powell again for rate cuts, with the announcement of the latter’s replacement expected soon (his term ends in May 2026). The 10-year Treasury yield rose initially on the Israel–Iran conflict and consequent oil price concerns, but faded during the week to end at 4.40%, being largely unchanged over the weekend despite the US’s actions.
Also of note, the SNB cut its interest rates to 0.0%, signalling a potential to move into negative rates to curb currency appreciation, with Swiss government bond yields now negative up to 3 years.
This week, watch for upcoming consumer price index (CPI) data, and rising oil prices amid risks of a Strait of Hormuz closure, which could drive upward pressure on inflation and rates.
A lower-yield landscape strengthens the appeal of high-yield bonds
Forex & Commodities
Last week, the USD strengthened modestly with the US Dollar Index rising to levels of above 99.00. The EUR/USD edged lower to levels of 1.1450, while the USD/JPY rose to levels of above 145. The SNB’s 25-bps rate cut had no impact on the CHF: the SNB’s conditional inflation forecast shows no expectation of deflation, indicating that negative deposit rates are not imminent.
Safe-haven currencies like the CHF will remain well supported in the near term given events in the Middle East. Gold should consolidate at levels of around USD 3,350 per oz, with potential upside above USD 3,400. Oil prices also rose above USD 77/bbl, with risks clearly skewed to the upside in the short term on any potential supply disruption.
The coming week’s data calendar is light, with the Purchasing Managers’ Index (PMI) prints being the main event; any signs of elevated prices paid and falling forward expectations will weigh on the USD.
Gold faces near-term upside potential above USD 3,400
The opinions expressed herein are correct as at 23 June 2025 and are subject to change without notice. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
