June 2025: A Big Beautiful Market Review

In episode #12 of The Active Investor with SGH – June 2025: A Big Beautiful Market Review, Steve Hiscock and Rob Hogg break down the calm market response to rising geopolitical tension, the surprising lack of volatility, and what the passage of the “Big Beautiful Bill” means for earnings expectations. They explore the continued strength in equities, shifting global capital flows, the role of the US dollar as a safe haven, and whether investor complacency is starting to creep in as risks are quietly re-priced.

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June 2025: A Big Beautiful Market Review

Transcript:

Steve Hiscock:

Hello to everyone listening to our podcast, The Active Investor with SGH. I’m Steve Hiscock, the Chair of the company, and it’s my pleasure to be your host again for today’s episode. In today’s podcast, we’ll examine what happened in June 2025 and discuss the outlook going forward. This podcast is being recorded on Wednesday, July 2, 2025.

And joining me again today is our Chief Investment Officer, Rob Hogg. Hi Rob. Welcome back again.

Rob Hogg:

Thanks, Steve. It’s great to be back, as always. Thank you.

Steve Hiscock:

So, Rob, again, June was a busy month for news. The US struck three nuclear sites in Iran. Iran struck back, and the oil price rose strongly before falling back. US hard data is starting to show signs of a slowing US economy, but the Fed still did not cut rates, and then Trump naturally stepped up his attack on the Fed Chair. And so, from most people’s viewpoints, it would have been reasonable for investors to expect far greater market turbulence in June. Obviously, the oil price was the exception, but that really wasn’t the case, was it? In fact, the equity markets rallied. Could you please provide a summary of what happened in June and the reasons behind it?

Rob Hogg:

I think as you’re just saying that, the word that we used last month you might remember, but that you sprung on me. Perhaps it’s a case again of investors becoming increasingly accustomed to this sort of volatility. Yes. Indeed, some of the events we witnessed during the month would have led one to expect significantly more volatility and, in fact, market weakness. But, really, apart from the oil price, which rose quite sharply around mid-month, but then it gave away a lot of those gains by the end of the month, as a ceasefire seemed to be in place and working. As the likelihood of trade deals between the US and both the EU and China seemed more likely, the Canadians who had called for a global digital tax then cancelled that call at the very end of the month.

The pending passage of Trump’s Big Beautiful Tax Bill, which has subsequently gone through the Senate and will go back to the House. We’ll talk about that in a little bit. And then talk as well that the US administration might delete section 899 from its budget legislation. So, all of those sorts of elements seemed by the end of the month to leave the market in a more optimistic sense than they were at the start of the month, despite everything that had happened from a geopolitical point of view. And all of the ongoing turbulence and uncertainty we have from this US administration.

Steve Hiscock:

So, what were the key market moves?

Rob Hogg:

Well, look, here in Australia, the market moves are relatively muted. The broader equity market returned almost 1.5 per cent, but that was largely overshadowed by the US. So, the S&P rose around 5% for the month and similarly in interest rate markets.

Our markets didn’t move much at either end of the yield curve, whereas US yields did move quite a deal, indeed more than twice as much as ours. And that was largely a reflection of the fact that US investors are now expecting a higher probability that the US Central Bank will cut rates. And sooner than they had thought, at the beginning of June. Here in Australia, while the market moved to a more than certain expectation of a rate cut next week, that wasn’t hugely different from where our market expectations started in June. So, it was really about a change in monetary policy expectations in the US.

I think that was responsible for what happened with rates there, and for equities. It was the ceasefire, the passage of the bill, and some signs that some of these trade negotiations will come to a fruitful end ahead of the July 9 date that Trump has set for this to occur.

Steve Hiscock:

So, in summary, I mean, oddly enough, market sentiment improved. Is that right?

Rob Hogg:

Yeah. Well, if we just look at the level of equity markets. Yes, it did over the course of the month. It wasn’t incredibly turbulent during the month, either. So, even as the US fired on those nuclear sites, even as the Israeli/Iranian hostilities began, we just didn’t see huge downward moves in equities or huge downward moves in bond yields, or for that matter, a huge upward increase in the US dollar. And the US dollar itself ended the month a bit lower, so it’s quite an interesting set of market reactions to what’s been going on.

Steve Hiscock:

And, is it fair to say that the market’s becoming a little bit more comfortable on the tariff side?

Rob Hogg:

Yeah, look, there are several issues here they’ve been worried about. One is the disruption of tariffs on sentiment, spending, and investment. And, look, we haven’t seen a huge lot of signals that that’s occurring. Yes, some of the so-called hard data is slowing, particularly in the labour market. Look, perhaps this Thursday night, when the next report comes out, we may get some payback for that. However, employment growth has continued, albeit at a slower pace so far. We haven’t yet seen the full impact of inflation.

So far, there’s no indication that inflation has increased, even in its broadest sense, across the US economy. Additionally, I think that was a positive for the month as well: some of the negative impacts from tariffs on spending or inflation haven’t yet materialised.

Steve Hiscock:

So, Rob, one of the things you’ve been talking about in a couple of reports is your discussion about the changing nature of portfolio flows into the US and how you see that affecting things. Can you talk about that?

Rob Hogg:

Yeah, a couple of months ago, I came across some research from Citibank, or Citi as they’re now called. I beg your pardon. They’d conducted some analysis examining the nature of the inflows into the US. The US runs a current account deficit, which needs to be financed by foreign investors. This means that they spend and invest more than they save. Traditionally, a significant portion of portfolio inflows into the US has been directed towards US treasuries. So, into government bonds, but that has changed in the last 5, 6, 7 years, such that foreign ownership of US equities has increased significantly, and that’s taken on a much more important role in financing the current account deficit. Indeed, post-pandemic, the US has become an importer of equity capital.

So what does all that mean? The implication of this could be that equities are a riskier asset class relative to bonds, which are usually considered defensive. Not always, but usually. So, when we’ve had big market drawdowns globally, so the equity market falls, the US dollar has often acted as a safe haven. One of the reasons for this may have been that treasury bonds, which offshore investors typically owned, would often rally and rise in value. Currently, we’re in a situation where market sell-offs, potentially affecting equity markets, may prompt investors to flee the US and the US dollar as a consequence.

Therefore, it’s the underlying nature of these portfolio flows and how they interact with market drawdowns that may be causing a shift in the US dollar’s role from being a safe haven to being, in fact, a risk-on/risk-off type currency. More so like the Aussie. However, for Australian investors, if this pattern continues, it has some significant implications for hedging global equity exposures.

And perhaps the counter-trend nature of the Aussie dollar to global drawdowns in equities is changing. And that’s certainly what we saw and have seen during the course of this year. The Aussie has generally risen during the month of June despite all the turbulence. There are some genuine questions about the US Dollar and whether it will remain a safe haven.

Steve Hiscock:

Yeah. And that’s right. The other question is whether it’s cyclical or structural. And you know, how long that takes and whether we’re seeing the, you know, as we’ve discussed a couple of times before, Rob, whether we’re seeing the end of this, as you were talking about, as the safe haven.

Rob Hogg:

Well, and that’s right. I believe this is also tied to the broader narrative of US exceptionalism. So, US equities had a very strong run into the end of last year. European and Asian equities experienced a poor run. This year has been the opposite, broadly speaking, although not in June. Interestingly enough, European markets were weaker as a rule. So, imagine that many global investors who have moved out of the US into Europe may now be wondering: Is this whole IT/AI story indeed over? Should we rethink the US? Is it still perhaps exceptional even though we’ve gone through a six-month period of wondering indeed whether it was exceptional? So, we’ll only see this in the fullness of time.

Steve Hiscock:

Yeah, exactly. Look, the other thing you mentioned right at the start, which is all over the news at the moment, is the Big Beautiful Bill, which was passed through the Senate last night. Could you discuss that and explain the implications?

Rob Hogg:

Yeah. Look, as with most things in the US, this is highly political, to put it bluntly. And, look, the votes so far on passing this bill have been down to one vote either way. Earlier in the month, the bill passed the House, then went to the Senate, and finally, it passed through the Senate just last night.

But that was only because Vice President Vance voted in a tie-breaking vote. So, it’s now gone through the Senate with some slight adjustments. So, it’ll have to go back to the House. And they only passed it by one vote. So, it’s still by no means a done thing. However, interesting are the assessments by investors about what the entire bill will mean.

So, for example, the Council of Economic Advisers. Now, they are a branch of the Executive Office of the President. So they are, sort of, White House appointed and on the side of the President. They’ve got some very different estimates for the impact of the budget and tax bill. And in large part, that boils down to their GDP estimates.

They’re assuming average growth of 3% in GDP over the next 10 years. And as a consequence, they’re much more positive about the stimulatory potential impact of the cuts in taxes, deregulation, and so on. Whereas, if you look at what the Congressional Budget Office is estimating… The CBO, or Congressional Budget Office, is a truly independent entity that supports Congress. They have a completely different scenario. They’re not assuming growth to be anywhere near as strong. And what we tend to see in the press is related more so to the CBO, the Independent Correctional Budget Office estimates. And that’s probably fair because they are indeed independent.

However, if we look at their estimates, there’s a significant increase in the size of the budget deficit over the next 10 years. But, any way you cut it, it’s all about cuts. Things like cuts to healthcare spending, including Medicaid, that’s the government insurance program for low-income Americans.

It’s all about a continuation of tax cuts that were initiated in the previous Trump administration back in 2017. And it’s all about increased spending on defence and border security, for example, and reduced subsidies for renewable energy. So, that’s really the nature of the breadth of the bill, but its overall impact depends on your estimate of what it’s going to do to longer-term GDP on a year-to-year basis.

If you’re more optimistic, like the in-house Council of Economic Advisors, they see an overall positive impact. Whereas, if you are less optimistic, as the CBO are with their estimates, it’ll have quite the opposite effect. And this needs to all be seen as well in the context of what is already a pretty serious budget deficit in the United States: at a time when the unemployment rate is low, at a time when economic growth is ongoing, and that’s not really part of the cycle we’d expect to have the very large budget deficits that the US government is already running.

So, where do we look for a sense of how this is all panning out? Again, we look to the bond market. Interestingly enough, with the passing of the bill last night through the Senate, there was very little move in the treasury bond market at all. So, on balance, bond market participants were reasonably sanguine last night.

Steve Hiscock:

Yeah. No wonder it’s political, though, right? So, I mean, no wonder it’s so close. You can imagine the Democrats, you know, all voting against this thing, particularly with the healthcare spending cuts.

Rob, let’s go back to central bank rates. So, the Fed didn’t cut, and the Bank of England also didn’t cut. So, what is going on there?

Rob Hogg:

Well, look, both of these central banks, they almost had, not quite, but almost had interchangeable statements after their policy rates were left unchanged. And it’s all about uncertainty.

And it’s all about maintaining, if you like, the option to potentially cut rates. Because that’s still the direction they’re moving in, to potentially cut rates at coming meetings. So, in the US in particular, it was no surprise, as we’ve said. They weren’t expected to cut rates, and they’re still not expected to cut rates at the end of July, which will be their next meeting; however, that probability is shifting.

There are an increasing number of Fed members, both voting and non-voting, discussing their views on what the Fed could and should do. And there are definitely several doves, as we described them, that are talking about rate cuts. We’ve, of course, got the President berating the Chairman of the Fed and talking about bringing forward when Trump might announce who the next Fed Chair may be.

It’s not due until around the middle of next year. And, only today, we’ve got the Fed Chair himself being a little more equivocal about his outlook for the end of July. However, presently, there isn’t much priced in in terms of expectations. But if we were to get a very weak employment number, for example, on Thursday night, or if we were to see that other broader real economic data, the hard data, if the pace of slowing picked up, we could see a change in those rate code expectations in the US and that could occur quite quickly.

Steve Hiscock:

Right. So, that’s more likely to happen this month. I mean, Rob, something you’ve been discussing over the past few months is the divergence between the soft data in the US and the hard data—the actual data that reports actual events rather than expectations—but they seem to be converging. But is it the hard data that’s starting to soften rather than the soft data hardening?

Rob Hogg:

What we’ve seen is that soft data, survey data, household confidence, corporate confidence, really fell away incredibly sharply about three or four months ago and reached, in some cases, multi-year lows. We’ve seen a slight increase in some of those levels over the last couple of days, but they were probably already at extremely high and unsustainable levels. They bounced back a little. However, as you say, there appears to be a convergence, particularly with the harder data, which we are primarily examining here, including employment data, initial jobless claims, and spending, among other related metrics.

They are just starting to lose a little bit of momentum. So yes, they are converging. Partly, the softer aspects are bouncing back a little, but also the harder aspects, such as actual spending and investment, seem to be losing a tiny bit of momentum as well. However, I think it’s also worth noting that it’s still probably too early to be certain how this will pan out. The data is noisy. The tariffs have impacted spending patterns.

We noted that, in particular, a personal spending number released in May showed a significant decline in motor vehicle sales. Still, we’d seen a substantial increase in motor vehicle sales back in March. Indeed, the increase in March is almost exactly matched by the decline in May. These are very significant numbers, reaching 50 billion at an annualised rate. These huge swings make it somewhat challenging to determine the underlying trend in the economy.

But as best we can judge, it does seem to be losing a little bit of momentum. Inflation pressures appear to be losing some momentum as well. We haven’t seen the tariff-impacted increase that some had thought might occur. So, the moons are aligning in a direction that suggests the US Fed may cut rates. The question now is whether it will be as soon as the end of July or perhaps another couple of months further away.

Steve Hiscock:

And across the pond. You’ve got Europe which is in a slightly different position, particularly Germany. So, the outlook is quite strong there, and we’ve discussed it a bit.

It’s initially driven, perhaps, by defence spending. But it’s started to look pretty strong, isn’t it, Rob?

Rob Hogg:

Yeah, no, you’re right. A couple of months ago, we had the German election earlier this year, and then we had the passage of an incredibly significant fiscal spending bill in its aftermath. Although, interestingly enough, passed by the Parliament as constituted before the election, the candidates that won in the election were actually in the Parliament. But anyway, that was passed. And this, as you say, is all about spending, mainly about spending in defence and infrastructure.

And that has already had a significant impact on equity markets, on the nature of our performance by particular sectors. So, defence and infrastructure related. However, it’s also now having a broad impact on sentiment. We’ve now seen, for a couple of months in a row, that business sentiment in Germany has started to pick up across several sectors. And that’s following the election and following the passing of the fiscal reform legislation. Therefore, it’s difficult to underestimate or underplay the significance of this reform in the context of the German economy. And that will have flow-on effects across the rest of continental Europe. That has been a significant watershed event this year.

Steve Hiscock:

Yeah. Many European countries, including the UK, have also committed to this increase in defence spending. So, there will be stimulatory effects there, across Europe. Rob, let’s now move to Australia.

Employment appears to be okay, and inflation seems to be under control. The RBA, the Reserve Bank, didn’t meet during the month. And you’ve mentioned that it’s more than fully priced in, with potential rate cuts. Could you please unpack all that?

Rob Hogg:

As you just said, employment here remains, surprisingly, remarkably robust.

The unemployment rate remains at a low level of 4.1%. Employment growth over the last year or so has increased by almost two and a half per cent. And so that’s stronger than the 10-year average that existed before the pandemic, that was around 1.7. So that’s been incredibly strong.

Hours worked are solidly up by a bit over 3% year-over-year. Although that’s somewhat the case, as far as the RBA is concerned, in contrast to the story we’re getting with the CPI, in the sense that we now have these monthly measures of the CPI. They’re moving in the right direction.

The May number was released during the month of June. And the key number there is this so-called trimmed mean measure that came in at 2.4% in May. That’s the lowest annual rate since the end of 2021 and represents a significant decrease from April. This particular measure strips out the 15% at either end of the price change spectrum. So, the biggest increases, which account for 15% of the total, are also found at the other end of the spectrum. So, either the smallest increases or the largest declines in prices during the month. And that’s the number of the RBA looks at.

And look, following that particular release, market pricing moves a little bit further, and now, quite literally, the market’s pricing a 27 basis point cut at the RBA meeting next week. Now, they don’t move in 27 basis point increments, so the way we interpret that is that there is more than a 100% probability that the RBA will cut next month. And, as we mentioned earlier in the year regarding rate cuts, the RBA has done nothing to disabuse the market of its expectations, nor has it communicated with the market to try to jawbone it away from what is very clearly priced in. That being the case, it seems extremely likely, as likely as anything ever is in financial markets, that the RBA will move to cut rates for the third time this year next week, the second week of July.

Steve Hiscock:

So, from an equity market perspective, therefore, the market is still comfortable with that.

But the US was up really quite strongly in the month. The ASX lagged a bit. I mean, it was still positive, wasn’t it? As you say, it was up almost 1.5%, but it lagged the US, didn’t it?

Rob Hogg:

Yeah, no, it absolutely did. The US saw a rebound in tech-related sectors at the end of the month.

And that really gave it a fillip towards the end of the month. As we’ve discussed before, the local market lacks exposure to those sectors. Look, we had yet another month where CBA hit another record high and closed the month up another 5%. It’s now up 20% in the first six months of the calendar year.

And, given that it’s the largest stock in the market and continues to rise at a rapid pace, it drives performance here in the Australian market. Much to the chagrin of many, many active managers, who are scratching their heads and trying to understand the valuation that the market has put on this stock.

It’s been the change in valuation, specifically the PE ratio, or the price that investors pay per dollar of earnings. That has been, by far, the overwhelming influence in driving the CBA price over the past year. It’s been going on for quite some time. However, as the stock becomes increasingly larger relative to the rest of the market and continues to rise at such solid levels, it truly is the defining stock in our market. Not unlike what NVIDIA was doing in terms of contribution and importance in the US market, more so last year than this year. However, it continues to confound many investors.

Steve Hiscock:

Yes. These things happen until they don’t. And that’s kind of a ridiculous statement to make. However, it is confounding investors, and there are simple factors at play. There’s no one selling. And that’s neither retail nor wholesale, because wholesale, as you say, involves wholesale investors. Institutional investors are generally probably underweight. So, they can’t afford to sell, and retail certainly isn’t selling either. So, it’ll be interesting to see how long it lasts. Santos also received a proposal during the month.

Rob Hogg:

Yeah, so Santos received a so-called non-binding indicative proposal from a consortium led by XRG, which is a subsidiary of the Abu Dhabi National Oil Company and Carlisle. Interestingly enough, they priced the offer in US dollars. Which, on the day of the offer, was USD 5.76, equivalent to around AUD 8.90 on the same day. As you can imagine, that offer drove the stock price higher during the month. It closed about 16% higher at the end of June at $7.66.

Steve Hiscock:

Yes. And there’s a long way to go on that one. Particularly, it’s non-binding. So, Rob, just in terms of the overall market then, where are we going from here? What’s coming up in the next few weeks that’s going to drive markets?

Rob Hogg:

Let’s start, as we usually do, with the US. Because what happens in the US does drive what happens here. The equity market drives interest rates, particularly at the longer end of the curve, and influences the currency. So, let’s just start there. A couple of things coming up. First, labour force data on the first Thursday of the month. As we’re recording this today, that’ll be tomorrow night because Independence Day is on Friday, the 4th. The market is very focused on what happens with employment in the US. So, that nonfarm payroll report will be incredibly important.

And then going into next week, it’ll be the July nine trade deadline. As we mentioned earlier, there appear to be more positive signs regarding potential deals with the Chinese and Europeans. But then again, as we’re speaking now, there seem to be issues with the Japanese, and they’re proving, I think Trump may have even said it there, much more difficult to come to an agreement with.

However, by and large, things seem to be moving in a direction that will result in a deal being set with most countries. And where they’re not, perhaps deadlines will be extended. And where there can’t be agreement on that, perhaps a new tariff rate is set. But I think it’s important to remember that wherever we end up in July, we won’t be where we were before April 2. On Independence Day, we will have a higher tariff regime globally compared to where we were before all of this began.

So, in that context, the end of June sort of looked like the market pricing in a goldilock scenario. So, increased expectations of a more dovish Fed, de-escalation of the Middle East tensions, and progress in US trade negotiations. But all of this is in the context of the fact that a number of these things could be quite tenuous.

We’ve spoken several times today about the market ending on quite an optimistic note, and I think we need to remember that. We indeed ended June with a quite optimistic tone in market trading.

Steve Hiscock:

Are there any risks to the market do you think?

Rob Hogg:

Well, they would be that, say, employment weakened very sharply.

If we’ve got a negative employment number, that would be a big market mover. If we had a rebound in inflation, that would be a negative market mover. And, of course, if we had a renewed deterioration in the Middle East, that would be a negative as well. And, if we were to see that the tariff uncertainty has more broadly slowed the economy, and/or it has brought about price increases, all of those, so in a sense, the flip side of all of the stuff that looked Goldilocks like at the end of the month, if that all flipped, we would face quite a different sort of scenario. Here in Australia, the market’s not cheap. There’s the overwhelming influence of one stock, CBA.

However, the thing that is starting to unfold here, and we received an update on this just today, is that the consumer has not bounced back since the RBA started cutting rates in February.We had retail sales out today, up just 0.2 for May. The annual rate of growth is slowing. It’s now just slightly over 3% year-on-year. And I think it’s fair to say that, using the hard data parlance here in Australia, the hard data on consumer and household consumption have really disappointed so far this year.

So, that adds to the argument for the RBA cutting rates, which seems, as we said, almost certain next week. However, we need to see some signs of a pickup and some indication of a response from a spending perspective. That’s really what the market is expecting: a bounce back, which will increase confidence. I think, probably for Australia, in the context of what’s going on here, that is probably the biggest risk here. If we don’t see a bounce back, earnings estimates will be disappointed as a result.

Steve Hiscock:

I mean, look, the vast majority of that, obviously, in terms of earnings, won’t come through for a few weeks. But it’ll be interesting to see. We’ll have lots more to talk about Rob, I suspect, at the end of July. Rob, thank you again for your time. That brings us to the end of today’s podcast. We’ve looked at what happened in June 2025. We’ve looked at what it means for investors going forward. And the reality is that, despite June being a surprisingly low-volatility month, the expectation is that unpredictability and volatility will remain for some time. We hope you enjoyed today’s episode. Please subscribe to stay up-to-date with future podcasts.

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Disclaimer:

This podcast is produced by SG, Hiscock and Company. It does not constitute financial advice and assumes a certain level of knowledge. It’s general information only and does not take into account the investment objectives, financial situation, or needs of any person and should not be considered a recommendation. For more information, visit: https://sghiscock.com.au/podcast-disclosures-and-disclaimers/.