June turned out to be a surprisingly positive month for the markets, despite the military conflict between Iran and Israel. Equity indices rose by 5–6%, while bond indices gained 1–1.5%.
During the short-term war, Israel demonstrated full military superiority and achieved its tactical objective of halting uranium enrichment in Iran. The likelihood of a regime change in Iran remains fairly high, creating new opportunities for Azerbaijan to strengthen its position and for the expansion of military infrastructure in Iran.
Stock Market Growth Amid Declining Political Risks
Equity markets rose in June amid a decline in the political risk premium and positive outcomes from U.S.–China trade negotiations. The current S&P 500 valuation at 22x is near historical highs, which, in our view, increases the likelihood of a market correction in July, especially under pressure from Trump to conclude the trade talks.
Economic Data: Steady Growth and EU Support
Economic data remains fairly positive due to increased fiscal support in the EU and the relatively limited impact of Trump’s tariff policies in the U.S. Analysts expect U.S. GDP growth to exceed 2% in the second quarter, following a 0.5% contraction in the first.
Fed Policy and Rate Expectations
The Federal Reserve kept the interest rate unchanged but lowered its forecasts for economic growth and inflation. We expect a 0.5% rate cut in the US by the end of the year.
Trump’s bill and the increase in the national debt
Oil Market: Price Fluctuations Amid the Conflict
Oil prices rose in June to $75 per barrel for Brent on expectations of the Strait of Hormuz being blocked following an Israeli attack, but fell below $70 in early July amid Iran’s inability to escalate the conflict. We maintain our forecast that Brent prices will remain in the $60–70 range until the end of the year, supported by increased production from Saudi Arabia aimed at gaining market share.
Gold Market: Weak Reaction to the Conflict
Gold prices showed a weak reaction to the conflict in Iran, as investors did not expect a significant impact on the global economy. We maintain a positive outlook on gold, with a target price of $3,800 per ounce, supported by a weak dollar and central banks exiting the US government bond market.
Dollar Index: Decline and Outlook
The dollar index against a basket of currencies fell by 3% in June and continued to decline following the increase in the US national debt limit. Technically, the dollar is already oversold, but we expect it to decrease by another 5–6% in the coming months due to the flow of global funds from the US to the EU.
Investment Strategy: Reducing Exposure to U.S. Equities
Overall, we recommend tactically reducing exposure to U.S. equities and increasing allocations to emerging market stocks and bonds, which benefit from a weaker dollar and reduced tariff risks.