Global Risk Monitor: Week in Review – June 27

Last week’s market tone reflected a convergence of stabilizing macro forces: easing geopolitical tensions, falling oil prices, and growing expectations of Federal Reserve rate cuts. But beneath these surface-level catalysts lies a far more powerful narrative: the AI revolution.

AI to Transform Everything:
Artificial intelligence is rapidly emerging as the dominant force behind market optimism. Its potential to unlock exponential gains in productivity and profitability is beginning to be priced into equity valuations. We believe the market is still underestimating the speed and scale of this transformation.

What’s unfolding is not a cyclical rally but a structural revaluation. U.S. companies are leading a wave of accelerated AI adoption, deploying the technology faster than their global peers, including even China. Americans are embracing AI tools at a pace that eclipses the adoption curves of past digital innovations, including smartphones and the internet itself.

Of the world’s ten most widely used AI platforms, eight are American, led by ChatGPT. This leadership is not just symbolic, it’s strategic. As AI diffuses across sectors, from logistics and legal services to healthcare and finance, its compounding effects will reshape business models, labor markets, and economic output.

In our view, the market is only beginning to grasp the magnitude of this shift. The coming quarters may mark the inflection point where AI-driven gains move from speculative to foundational.

Short-term Uncertainty:
Nevertheless, the short to medium-term economic outlook remains complex, as signals of slowing growth persist alongside stubbornly high inflation data. Meanwhile, international developments, from congestion at European ports to China’s tentative recovery, continue to shape capital flows and investor sentiment. The result is a market environment driven by optimism around the AI trade and policy easing but shadowed by structural and tariff-related uncertainties.

Geopolitical and Market Response:
Global risk sentiment improved markedly following a de-escalation in tensions between Israel and Iran. The reduction in conflict risk was a key factor in oil’s 11% weekly decline, with Brent crude falling below $72 a barrel. This decline was welcomed by equity markets as a disinflationary tailwind, particularly for rate-sensitive and consumer-oriented sectors.

U.S. markets responded with renewed strength. The S&P 500 and Nasdaq both reached all-time highs, buoyed by strong performance in large-cap tech. However, the Dow Jones Industrial Average continues to lag, sitting roughly 3% below its previous peak. Market breadth, though improving, remains below its 2021 highs. Moreover, only three of the “Magnificent Seven” members — Nvidia, Microsoft, and Meta — are making new highs.

Foreign markets were mixed. Japanese equities gained on supportive monetary policy signals, while European indices underperformed as tariff uncertainty and port congestion weighed on investor confidence. According to reporting on European logistics, congestion has intensified due to changes in U.S. trade policy and low river flows, leading to longer shipping delays and rising costs, factors that could limit Europe’s export competitiveness in the near term.

Monetary Policy and Inflation Outlook:
Investors’ expectations for monetary easing accelerated this week. The Global Macro Monitor’s updated yield table (see tables below)  reflected a market increasingly confident in a rate cut as early as September, with nearly four 25-basis-point cuts now priced in through March 2026. This dovish shift in expectations followed a batch of mixed economic data.

Core PCE, the Federal Reserve’s preferred inflation gauge, edged higher to 2.7% in May, but remained well below last year’s peaks. Consumer spending slowed slightly, while durable goods orders surged, reflecting resilience in business investment, especially in aerospace and defense. Treasury yields drifted lower across the curve, reinforcing the view that policy easing may come sooner and proceed more aggressively than previously expected.

T. Rowe Price noted that market participants are recalibrating their inflation expectations, especially as energy costs recede and supply chains stabilize. However, the firm also emphasized that volatility could return quickly if inflation surprises to the upside or labor market conditions deteriorate unexpectedly.

Trade and International Developments:
Trade policy continues to play a pivotal role in shaping global sentiment. Canada’s withdrawal of its planned digital services tax is seen as a diplomatic concession to the U.S., aimed at preserving broader trade talks. Meanwhile, the situation in Europe remains strained. Port congestion, partly attributed to recent tariff disruptions, coupled with low river flow is creating bottlenecks in key supply routes. These issues may contribute to higher near-term inflation in the region and complicate the European Central Bank’s policy outlook.

In Asia, China’s economy showed signs of tentative recovery, supported by policy stimulus and a slight improvement in industrial activity. However, structural headwinds, ranging from weak property markets to soft external demand, limit the scope for a robust rebound.

Conclusion:
Markets appear to be responding positively to declining energy prices, lower inflation expectations, and the prospect of accelerated monetary easing. Last week’s record-setting equity gains reflect investor confidence in smooth sailing ahead, bolstered by the view that the Fed is preparing to support growth. Yet, the combination of shifting market leadership, uneven economic data, and unresolved global trade issues warrants a balanced approach. While surface-level indicators remain strong, prudent risk management remains essential as markets navigate the intersection of macro optimism and underlying fragility.

Markets

• U.S. equities advanced further, supported by rising confidence that the Federal Reserve may begin cutting rates later this year, reduced geopolitical tensions, which led to lower oil price.
• S&P 500 neared the 6200 level, with technical momentum fueled by rate-sensitive sectors and declining Treasury yields.
• Market breadth strengthened, with financials, industrials, and consumer discretionary stocks benefiting from the outlook for lower interest rates.
• Expectations of Fed rate cuts lifted risk sentiment, though geopolitical and trade-related uncertainties still present headline risks.

U.S. Market Analysis

• Rate cut anticipation drove investor positioning, with cyclical sectors and small/mid-caps outperforming defensives.
• Earnings season reflected margin resilience, with forward guidance increasingly referencing expected relief from interest rate pressures.
• Economic growth remained modest, but markets interpreted the policy shift as supportive of extending the expansion.
• Bond yields fell across the curve, as Fed funds futures increasingly priced in multiple rate cuts by March 2026.
• Credit spreads narrowed, especially on lower grade bonds, suggesting markets expect rate cuts to reduce refinancing pressure and support corporate balance sheets.

Global Market Analysis

• Europe: Major equity benchmarks edged higher, tracking U.S. gains. Eurozone banks rallied on spillover expectations that ECB policy may follow Fed easing.
• Germany’s equity market rebounded, supported by expectations of global monetary policy coordination favoring pro-growth stances.
• Japan: Equities were mixed, with exporters gaining on yen weakness tied to diverging rate paths between the BoJ and the Fed.
• BoJ maintained ultra-loose policy, while market participants assessed the global implications of potential U.S. easing.
• China: Mainland equities saw modest gains; anticipation of U.S. rate cuts bolstered sentiment in emerging markets via currency and capital flow channels.
• Cross-border fund flows shifted, as investors repositioned toward higher-beta international equities on improved global liquidity outlook.

Economics

U.S. Economic Overview

• Labor market data showed stability, but rate cut expectations dominated market pricing and commentary.
• Consumer demand held steady, with analysts anticipating a boost in credit-sensitive spending as rates fall.
• The Fed’s communications signaled data dependency, but markets interpreted the tone as incrementally dovish.
• Housing activity showed early signs of revival, aligned with the outlook for more favorable mortgage rates.
• Core PCE inflation came in a bit higher than anticipated.  

Global Economic Overview

• Eurozone confidence improved slightly, aided by expectations of a more accommodative global rate environment.
• BoE officials noted global rate developments, adding to speculation that synchronized easing could occur in H2.
• Asia-Pacific equities gained, as investors positioned for capital inflows and better financing conditions amid easing bets.
• Emerging market central banks signaled flexibility, citing potential Fed rate cuts as a catalyst for domestic easing cycles.

Week Ahead (June 30 – July 4)

Key U.S. Events:

Economic Data

• Mon: ISM Manufacturing Index
• Tue: Factory Orders
• Wed: ADP Employment, Services PMI
• Thu: Nonfarm Payrolls, Jobless Claims
• Fri: Independence Day – Markets Closed

Earnings Highlights

• Mon: Lennar, BlackBerry
• Tue: Walgreens, Paychex
• Wed: Levi Strauss, RPM International
• Thu: Constellation Brands, Helen of Troy
• Fri: None Scheduled

Key Global Events:

• China Services PMI: Signals domestic demand resilience
• Eurozone Retail Sales: Insight into household consumption
• Japan Wage Data: Watchpoint for policy expectations
• Global Central Bank Commentary: Key for rate cut signaling across regions

 

Source: https://global-macro-monitor.com/2025/06/30/global-risk-monitor-week-in-review-june-27/