A different summer: Markets defy the lull
Mega IPOs, rate hikes, peace deals, and more. It’s all been happening in what has historically been a period when markets calm before the summer lull. This year is different in many ways. Tailwinds have held from Q1 earnings which did a good job of beating expectations in many of the indices covered. Just a month away from the next batch, it will be telling to see how firms have been navigating not just supply-related strains but the continued bedding in of AI. The jury remains out on all of this and more, directionally, though, we are seeing some trends worth being aware of…
Macro
As usual, we’ll dive into some of the (literal) comings and goings but for now what else is happening outside of the norm? I shan't opine on the on/off peace deal in the Middle East, rather leave it to the headlines which seemed to shift by the hour. With the Straits open for now, pressure has not eased on Russia’s shadow fleet of tankers, reminding us that we continue to live in uncertain geopolitical times. Whilst we are well off the highs in oil and gas, we are also experiencing heatwaves in the regions most exposed to fluctuating energy prices with the biggest importers, China and Europe, still most exposed..
For China, exports continue to rise aggressively. The latest print for May was a 20% year-on-year increase, with GDP beating the 4.8% estimate by 0.20%. Whilst this seems large, particularly in comparison to the US (2.1%) and world (2.7%), it is underwhelming for The Party. In the two decades from 1990, growth was firmly in the double digits 11 times (World Economic Forum). To continue to grow and compete, including in AI and data centres, investment in energy will need to continue. Worryingly, domestic demand has turned a corner, for the worse. Retail sales fell 0.60% last month, the first decline in just under four years (Trading Economics). As a reminder, and a topic we highlighted some years ago, the property crisis is now in its fourth year. Lower manufacturing investment is also a drag here. All this without even considering how Taiwan may play out (US-China Economic & Security Review Commission).
Other noteworthy movements bubbling under the surface are redrawing old assumptions and perhaps providing us with some redirection. The previously promoted (and, importantly, US-backed) India-Middle East-Europe corridor that looked to help return us to a global, connected world again post-COVID, looks to be under threat, the implications of which are broad in scope and impact on both investment and foreign policy, pointing once again to fragmentation (European Council on Foreign Relations). Related is the main driver for growth in Europe, namely defence. Spending for 2025 accelerated faster than at any point since 1953. For the first time, all 32 NATO members met their obligation to commit at least 2% of GDP to the sector. As a reminder, we have a new target in town…being a whopping 5% by 2035. A lofty number given how long it has taken to get to the old baseline, eyes and ears will be laser-focussed on the Ankara summit in July where allies will present how it is they are actually going to bring this to life (NATO).
Risk
What goes up must come down? The SpaceX IPO had been widely publicised for months now, and the excitement at launch was not unfounded. An over 40% increase from the chunky primary float at $135.00 (or $1.77 trillion) ensued in the days that followed as the retail frenzy took hold, only to come back down a little closer to earth but still holding onto a respectable 17% up. On the back of bond issuance to the tune of $25 billion in the second-largest hybrid deal of the year, taking the total raised in just a few short days to $100 billion. Apparently space is quite expensive! (Bloomberg)
Away from this, though, and more broadly, volatility has persisted as the headlines scrolled on, in short, though, we have seen all three major US indices hitting fresh all-time highs (CNBC). It wasn’t just war and AI speculation driving markets. The technology sector accounted for all 10 of the S&P 500's top performers in May, advancing 20% as a whole. On their Q1 calls, Alphabet, Amazon, Microsoft, and Meta guided to combined 2026 capex of roughly $725 billion, up about 77% on the prior year, with most earmarked for AI infrastructure. (Motley Fool).
There has also been a reasonable rally in the STOXX Europe 600, up close to 3% since the last time of writing, hitting an all-time high last week. A reasonable proxy for overall performance being a broad measure of the European equity market. Q1 earnings, much like in the US, were solid, with momentum somewhat stifled by ongoing trade tensions, made more acute by the dependency on energy imports (Global Banking and Finance).
Despite political uncertainty, in particular with a potential move further to the left, the FTSE 100 remains up 5% since January. Often referred to as being made up of the “old economy”, both pharmaceuticals and defence stocks continue to perform well. Given their overall contribution to the index, it has proved to be rather useful to have them in the index.
Credit
To an observer of historical trends, the current credit market demonstrates an extraordinary and resilient momentum. The ICE BofA US Corporate OAS currently sits near a twenty-five-year low at 80 basis points, which is vastly tighter than its long-term average of 150 basis points. Despite these historically narrow spreads, capital remains heavily attracted to the market, drawn by robust all-in investment-grade yields hovering between 5.0% and 5.5% (ICE).
When geopolitical tensions in Iran threatened a broader disruption, the market experienced only a minor tremor, widening high-yield spreads by a modest 30 to 40 basis points off their lows. By mid-June, optimism surrounding a peace deal quickly restored stability, proving the market's underlying inertia to be remarkably stubborn. With spread compression having largely run its course, future credit returns may no longer be driven by market shifts, but rather by the steady, passive accumulation of carry.
In mid-June, high yield traded firm with single-B credits outperforming on positive Iran developments, primary issuance was a light ~$6 billion, and fund inflows ran near $490 million, leaving the Bloomberg High Yield index up 0.44% with spreads around 266bp. A broad rate rally, driven by a 6% drop in oil, a softer-than-expected May CPI, and the emerging peace deal – lifted most fixed-income sectors. (Nuveen)
Nvidia priced a $25 billion investment-grade offering on June 15 – its largest ever and its first since 2021 – drawing about $85 billion of orders, making it the biggest chip-company bond deal on record. It notably included a 30-year tranche maturing in 2056, a bet that AI-infrastructure financing will run for decades, at a time when 30-year issuance had fallen to just 11.2% of total IG supply, near the lowest since 2011. (TechTimes).
Strain in the roughly $3 trillion private-credit market keeps building: Fitch put the trailing-12-month US private-credit default rate at 5.8% through January, the highest since the metric began. Morgan Stanley has warned direct-lending defaults could climb toward 8%, being ‘significant but not systemic’ after several major firms capped redemptions in flagship funds. A Financial Stability Board report in early May flagged hidden leverage, opacity, and interconnections with insurers as the sector's core vulnerabilities (CNBC). Worth keeping an eye on what JPM CEO Jamie Dimon described as cockroaches (CNN).
EUR
The ECB hiked 25 bps on 11 June – its first rate increase since the tightening cycle ended in September 2023 – taking the deposit facility rate to 2.25% (effective 17 June). Lagarde explicitly rejected the "insurance hike" framing and said the move was "robust across a range of scenarios" (ECB). Lagarde stopped short of pre-committing to a path, but flagged a second hike at the July or September meeting as "more likely" depending on data flow; ING characterised the press conference as Lagarde keeping the door open for further hikes (ING).
But what does the market make of all this? At the time of writing, roughly 40 additional basis points (or just shy of two hikes) are priced in, although this remains volatile and tracking oil and gas prices quite closely, as one might expect. The next full hike is predicted to come by October of this year (Bloomberg WIRP, 23 June).
May inflation in the euro area confirmed at 3.2% YoY (from 3.0% in April) – highest since September 2023 – with core jumping to 2.5% from 2.2% and Services accelerating sharply to 3.5% from 3.0%, while energy held at 10.9% YoY; this is the first month the shock is clearly bleeding into core. A wide spectrum once again across the euro area, with Sweden (1.1%) showing the lowest figure, whilst Romania came in highest once again (9.7%). (Eurostat).
The ECB notes the inflation paths for 2026 and 2027 have been revised up from March owing to a higher energy-price path, and growth for 2026 and 2027 revised down reflecting the war's impact on commodities, real incomes, and confidence. (ECB Monetary Policy Statement).
GBP
The Bank of England held Bank Rate at 3.75% on 18 June in a 7-2 vote – Megan Greene and Huw Pill (Chief Economist) dissented in favour of a 25 bps hike to 4.00%, vs only a single hike dissenter at the April meeting. Pill cited that "upside risks to the lasting achievement of the 2% inflation target have increased in recent months on account of events in the Gulf"; Greene framed the risks as "asymmetric." (Bank of England).
Roughly 40 bps of further tightening priced over the next year, with the next 25 bps hike most likely around the November MPC meeting (though, half a hike priced for September). (Bloomberg WIRP, 23 June).
Headline inflation for May was unchanged at 2.8% YoY (vs 2.8% in April), core up to 2.6% from 2.5%, services jumping to 3.7% from 3.2% – the services pickup is the standout and will weigh particularly heavily on the MPC given Pill's framing. (ONS).
Q1 unemployment rose to 5.0% (1.81m unemployed, up 192k YoY); vacancies fell to 705k in the three months to April – the lowest since early 2021. Payroll data showed a 100k MoM fall in April with prior months revised lower, suggesting hiring pulled back sharply post the Iran shock. (ONS). The risk of stagflation – where growth is low or non-existent but inflation remains persistent - is surely a concern for the Bank.
With Andy Burnham confirming he will run for the leadership, he is widely expected to enter Downing Street unopposed by 1 September. Gilts sold off on Friday on the by-election news before easing back earlier this week on the resignation. Burnham has been actively working to reassure markets, distancing himself from prior "in hock to the bond markets" comments and signalling broad fiscal continuity with Reeves, but his historically left-of-Starmer instincts mean any perceived softening of fiscal discipline could revive a UK-specific risk premium in gilts and sterling. (BBC)
USD
This month saw the first Federal Reserve meeting with Chair Walsh at the helm. Expectation had been for a President-leaning policy stance, being to cut rates and thereby further stimulate the economy by bringing down borrowing costs. Whilst there was no change in headline, Walsh himself seems to be more concerned with inflation at this point, indicating that he was not afraid to raise rates. Much like in the Eurozone, there has been a shift in how the central bank will vocalise its thinking. Forward guidance, previously in place to avoid market shocks out there, is to be replaced with that now infamous data-led approach in order to remain more nimble in these uncertain times (ODaily).
May’s job report demonstrated not just resilience but growth. Unemployment held at 4.3% and an additional 172K roles had been newly created. The numbers certainly beat expectations. Popping the hood, though, there are areas to pay attention to. Labour underutilisation is up along with periods between roles for those seeking work (Center for American Progress).
Most important in all of this right now though is inflation. The annual rate rose to 4.2%, up 0.40%, and the highest since April 2023. These are not the numbers you want. One can see how Chair Walsh has nowhere to go right now. The market does not appear to need the cancelled forward guidance, with the curve being the last to price in hikes to now being the most aggressive with almost two full hikes priced in for March of next year (0.46%, Bloomberg WIRP 23 June). Green shoots on output, at least, though, from the S&P purchasing managers index going through the all-important expansionary territory of 50 printing a healthy 52.2 (Bloomberg). Services, though, remain sluggish.
Overall, real GDP rose to 1.62% quarter on quarter according to the late May release (Bureau of Economic Analysis) led by non-residential fixed investment along with consumer and government spending rises. Residential investment and net exports shrank.
So what?
Rates have continued to remain higher for longer, and chatter that there is room to cut has all but gone. It seems we are now firmly back into the hiking cycle, albeit with considerable caution and frankly less conviction. Risk appetite remains high, credit premia low. The continued resilience of markets remains admirable. How long these conditions hold is hard to predict. It seems to me that for holders of cash, the landscape is certainly looking better than it has for some time.
*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.