Report - June 26, 20251. Ceasefire, Oil, and Market Sentiment:
Markets are stabilizing after a volatile stretch driven by geopolitical tensions between Israel and Iran. A ceasefire, brokered by President Trump, appears to be holding, encouraging risk-on sentiment across global asset classes. Brent crude has fallen back to $68.17 per barrel, erasing earlier war-driven spikes. Traders swiftly sold oil after Iran's symbolic missile attack on a US base in Qatar, interpreting it as a move to de-escalate rather than escalate. This rapid reaction, fueled by open-source intelligence and satellite imagery showing the base was empty, helped unwind the geopolitical premium in crude.
Energy consultancy Rystad noted Iran even increased crude exports amid the conflict due to lack of refining capacity. With OPEC+ boosting supply and US shale output high, the market anticipates an oversupplied scenario by year-end. Strategists like Amrita Sen (Energy Aspects) expect crude to test $50–60, while RBC’s Helima Croft said the White House is unlikely to tap the Strategic Petroleum Reserve, given sufficient alternative supply buffers.
2. Equities and Sector Rotation:
US equity indices were mixed: the Nasdaq 100 gained 0.2% to 22,237.74, while the S&P 500 and Dow Jones dipped slightly. The CBOE Volatility Index (VIX) dropped 1.1% to 16.77, signaling easing investor fear. Year-to-date, tech leads with XLK up 31.95%, followed by communications (XLC +23.46%) and discretionary (XLY +18.69%). Defensive sectors lagged: utilities (XLU +19.13%), consumer staples (XLP +9.15%), and real estate (XLRE -1.27%).
Recent sector performance reflects a recalibration away from energy and interest-rate sensitive names. XLE has tumbled 4.65% over the past five days, mirroring declining oil, while XLRE’s underperformance worsened, highlighting investor caution in yield-sensitive areas. The growth/value debate continues: large-cap growth (IWF) was the only factor posting a gain (+0.29%), while small-cap growth (IJT) fell 1.2%, underscoring preference for quality and scale.
3. Fixed Income and Sovereign Yields:
Rates edged higher. The US 10Y Treasury yield rose 2 bps to 4.32%. Germany’s 10Y bund climbed 3 bps to 2.57%, and UK gilts ticked up 1 bp to 4.46%, driven by expectations of higher issuance to fund increased NATO defense spending.
US Treasuries across the curve remain elevated: 1Y at 3.99%, 2Y at 3.77%, and 30Y at 4.81%. Despite global easing signals, sovereign borrowing costs stay elevated, reflecting inflation stickiness and geopolitical risk premia. TIPs and agency MBS have outperformed on a 1Y basis, with TIP +4.7% and GNMA +5.76%.
4. NATO Commitment and Fiscal Risk:
At The Hague summit, NATO allies pledged to meet Trump's demand for 5% of GDP in defense spending by 2035, a seismic shift from the previous 2% benchmark. While reaffirming Article 5 commitments, Trump emphasized US support hinges on European “burden sharing,” pressuring Spain for opting out. The summit declaration promises annual roadmaps and a 2029 review—coinciding with Trump’s potential exit from office.
Germany’s Chancellor Merz called the commitment a moment of “putting our money where our mouth is,” but bond markets reacted with concern. The FTSE 100 slid 0.5%, and the DAX fell 0.6%, reflecting fiscal anxieties tied to expanded military budgets.
5. Policy Front – Trump’s Tax Push & Debt Outlook:
The White House claims its proposed tax bill will lower debt via growth and tariff revenue. CEA estimates show debt-to-GDP dropping to 94% by 2034 with $8.5–11.2 trillion in deficit reduction. Yet the CBO projects the bill would add $2.4 trillion to deficits—and $2.8 trillion when factoring in higher rates.
Trump’s pressure campaign on Senate Republicans includes urging round-the-clock negotiations. However, concerns linger among fiscal hawks like Sen. Ron Johnson, who warned of “an acute debt crisis.”
6. Credit Markets and Insurance Breakdown Risk:
Credit spreads are holding stable, but US liability insurance is flashing red. Marsh data shows US casualty insurance rates have risen for 23 straight quarters. Executives at Everest and Aspen warn of a “breakdown” in coverage availability due to runaway litigation costs and “forever chemicals” claims. Everest’s reserves for US casualty risks now top $1.7 billion.
Insurers are lobbying for tort reform, and rate hikes of 20–25% in excess liability are becoming the norm. This insurance squeeze poses a serious inflationary threat to businesses, especially in logistics, construction, and hospitality.
7. Trade Disruption – FedEx Feels the Pinch:
FedEx shares dropped nearly 6% after warning of sharp deterioration in China–US freight, driven by the end of the “de minimis” $800 tariff exemption used by platforms like Temu and Shein. This lane, their most profitable intercontinental route, now faces structural weakness. While Q4 net income rose 13% to $1.65B, guidance for EPS of $3.40–4.00 (below expectations) reflects uncertainty ahead.
8. M&A Spotlight – Brighthouse Bidding Heats Up:
TPG and Aquarian Holdings are the final bidders for Brighthouse Financial, a $3.5B life insurer. Despite interest from Apollo, Carlyle, and Blackstone, many walked due to legacy annuity liabilities and high capital charges. The strategic appeal remains strong: control over policyholder premiums enhances credit origination capabilities for private capital platforms. An exclusive negotiation could emerge in the coming week.
9. Political Heat – Warren Targets Private Equity:
Senator Elizabeth Warren is probing PE firms (Apollo, KKR, Blackstone, Bain, Thoma Bravo) for lobbying efforts related to the “carried interest” loophole and private credit tax breaks embedded in Trump’s tax bill. The senator demands disclosures by July 2, while Trump pushes for bill signing by July 4.
The American Investment Council responded that raising taxes on private capital would “kill jobs” and hurt innovation. The legislation, approved narrowly in the House, slashes taxes and expands debt—a key flashpoint heading into summer recess.
10. Currency, Commodities, and Global Trends:
Brent crude trades at $67.95 and WTI at $65.18. Gold holds at $3,335, up 45% YTD, though recent profit-taking has slowed its rally. Silver (+26.2% YTD) and copper (+12.5%) also reflect bullish industrial demand.
In FX, GBP/USD is up 0.3% to 1.3705; EUR/USD is at 1.1681 (+0.02%). USD/JPY slid to 144.57 (-0.66%). On a 1Y basis, GBP and EUR are both up over 8%, while the yen is down nearly 10.5%, continuing its depreciation due to BOJ’s dovish stance.
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Equities:
Current Positioning: Equities are delicately balanced. The S&P 500 is up +3.6% YTD, Nasdaq +3.4%, but Dow only +1.0%, reflecting the rotation into growth, defensives, and high-cap tech. However, small caps are under heavy pressure (IJR/SPY -1.05% daily, down YTD), and value is again underperforming.
Tactical Implications:
Overweight: Large-Cap Growth (e.g., XLK, IWF) – Mega-cap tech remains the secular winner (+31.95% YTD in XLK). Given moderating rates and weak cyclicals, expect further leadership unless yields spike.
Underweight: Small-Caps (IWM), Real Estate (XLRE), and Energy (XLE) – These are vulnerable to tightening credit, low breadth, and oil retracements. XLRE is -1.27% YTD and XLE dropped -4.65% in the past week alone.
Neutral: Financials (XLF) – The sector is at a crossroads. While yields support net interest margins, the liability insurance shock and credit pricing discipline weigh on capital-intensive names.
Actionable View: Stay concentrated in quality tech and cash-flow-rich defensives. Consider rotating out of overextended discretionary and look for short-term mean reversion trades in oversold industrials only on technicals.
Fixed Income:
Market: The UST 10Y yield is at 4.32%, up 2bps on the day. Notably, the 2Y/10Y curve is flattening again (+55bps spread), but with upward pressure on the long end driven by fiscal overhang (NATO rearmament, tax cuts).
Strategic View:
Short Duration Preferred – Laddered Treasuries and 1–3Y paper outperforming (e.g., SHY +0.65% YTD). Long duration remains risky despite falling inflation, given massive expected issuance.
TIPS as Inflation Hedge – TIPs up +4.7% YTD continue to provide inflation-linked protection. Elevated defense and healthcare spending bolster this theme.
Credit Call: High-Grade Corporate (LQD) – Valuation remains stretched, but spread stability gives buffer. Prefer LQD over HYG or CWB, where spreads are at risk due to funding costs and insurance withdrawal risk.
Action: Maintain a core laddered Treasury base, with modest high-grade credit. Fade the long end on rallies; use TLT as a tactical short if 10Y breaches 4.4–4.5%.
Commodities:
Key Developments:
Brent crude fell sharply (-6.1%) post-ceasefire, now at $67.95. Markets no longer price geopolitical premium.
Iran’s production rising, US SPR untapped, and China’s buying shifting.
Gold stabilizing at $3,335 after peaking on war fears; silver remains stronger at $36.34 (+26.2% YTD).
Outlook:
Oil: Short-Term Bearish to Neutral – Expect continued selling on rallies unless supply chain disruptions emerge. Range: $62–70/bbl.
Gold: Wait for Re-Entry – Momentum slowing but structural inflation hedging still intact. Look for re-entry near $3,200. Position cautiously if dollar strengthens.
Ags: Avoid – Corn and wheat continue to slide. Corn -7.5% MTD and -10.3% 3M; soybeans -11.7% YTD. No catalysts to reverse.
Action: Tactical shorts in oil remain viable unless Iran–Strait of Hormuz risk flares again. Hedge tail risks with gold but reduce exposure if USD rallies.
Currencies:
DXY weakening slowly, but USD/JPY still at 144.5 (-9.42% 1Y), EUR/USD firm at 1.1681.
Sterling outperforming: GBP/USD +8.2% 1Y.
Implications:
Short USD/JPY Holds – BOJ still dovish, yen oversold, risk-on flows support reversal. High conviction macro long on JPY.
Watch GBP/USD – Strong rally, nearing overbought territory. Use strength to rotate to EUR if ECB surprises.
EMFX Mixed – Avoid high beta EM (ZAR, TRY) due to USD and rates. Selective value in BRL, INR if USD pulls back further.
Action: Maintain partial USD hedge via EUR and JPY. EMFX traders should stay risk-off short term; low carry + volatile backdrop makes it unattractive.
Credit & Insurance Markets:
Everest ($1.7bn reserves) and Aspen warning of “coverage breakdown” in US casualty insurance. Litigation exposure (PFAS, data privacy, social cases) is a systemic risk.
FedEx’s collapse in China–US freight (-6% equity) is a red flag on consumption + supply chain health.
Expect more insurers to restrict exposure to high-litigation US states or raise rates >25%.
Positioning:
Be cautious on mid-cap financials, reinsurers, and commercial real estate debt with liability linkage.
Corporate credit: Avoid HY and convertibles. LQD remains the safe zone.
