Muzinich Weekly Market Comment: Juggling act

June 23, 2025

If you have any feedback on this article or are interested in subscribing to our content, please contact us at opinions@muzinich.com or fill out the form on the right hand side of this page.

--------

In our latest roundup of the key developments in financial markets and economies, we look at whether investors are becoming blasé about global risks given the constant headlines surrounding the US administration.

Last week was a short one due to Juneteenth, the US holiday commemorating the end of slavery, but there was still no shortage of headlines. Investors may have been surprised by the relatively muted price action in the face of the G7 and eleven central bank meetings, combined with heightened geopolitical tensions in the Middle East.

Our favoured measure of volatility, the VIX, hovered around 20,^[1] reflecting lingering uncertainty but no further deterioration in sentiment. The clear winner was oil, with WTI crude prices rising more than 8% over the week,^[2] driven by supply concerns linked to geopolitics. Most other asset classes traded within normal ranges: government bond yields fell modestly, credit markets remained stable, and the Bloomberg World Large & Mid Cap Index dipped 0.35%.

Perhaps the most striking takeaway from the G7 gathering was the leaders’ statement, which totalled just 121 words — a stark contrast to the 19,834 words released in June 2024 and 5,108 words in December 2023.^[3] While this brevity could be seen as a demonstration of unity among members, it more likely reflects a lack of consensus on key issues such as Ukraine, climate, and the Middle East.

Central bank divergence

On the central bank front, the Brazilian Central Bank raised the Selic rate by 25 basis points to 15.00% in a unanimous decision, the seventh consecutive hike in this tightening cycle.^[4] The bank signalled it plans to maintain rates at this level until early 2026. Both Norway^[5] and Sweden^[6] cut policy rates by 25 basis points, following the European Central Bank’s lead.

Meanwhile, the Swiss National Bank became the first major central bank to bring its policy rate back down to zero, aiming to discourage investors from flocking to the franc after its recent strength contributed to consumer prices falling for the first time in four years (See ‘Chart of the Week).^[7]

The remaining central bank meetings resulted in rates staying unchanged. In Asia, the key event was the Bank of Japan (BOJ) meeting, with the central bank leaving its short-term interest rate unchanged at 0.5%, as expected.^[8]

However, in what could be a supportive move for its domestic bond market, the policy committee announced plans to slow the pace of quantitative tightening. Starting in April 2026, the BOJ will reduce its balance sheet at a pace of approximately ¥200 billion per quarter, down from the current rate of ¥400 billion. Adding to this support, the Ministry of Finance (MOF) announced it will cut the issuance of super-long bonds by ¥3.2 trillion through the end of March 2026 - a larger reduction than anticipated by markets.^[9] Notably, planned cuts to 20-year bond issuance are twice as large than suggested by earlier media reports.

What could higher JGB yields mean for other markets?

Year-to-date, Japan’s government bond market has underperformed its developed market peers, with the yield curve bear steepening and long-end yields rising over 60 basis points. Such moves have frequently been cited as a catalyst for similar steepening in government bond curves globally.

As Japanese yields have historically been extremely low, domestic investors such as pension funds and insurers have long sought higher returns in foreign government bonds. With Japanese government bond yields rising, however, the relative appeal of holding foreign bonds (especially after accounting for hedging costs) diminishes. Logically, this should result in Japanese investors reducing their foreign bond holdings, putting upward pressure on long-end yields abroad and contributing to global curve steepening.

Looking ahead, the combined slowdown in both bond supply and quantitative tightening should provide technical support for the long end of Japan’s yield curve, making economic fundamentals the primary driver of future yield movements.

In his press conference, BOJ Governor Ueda reiterated concerns about the uncertainty posed by tariffs and their potential impact on economic growth, while also underscoring the upside risks to inflation.^[10] Japan’s latest inflation data, which again exceeded consensus expectations (see ‘Chart of the Week’), should reinforce the BOJ’s conviction that its 2% inflation target is becoming more firmly entrenched.

In May, Japan’s core Consumer Price Index rose 3.7% year-over-year, up from 3.5% in April.^[11] This was largely driven by stronger services inflation, a key focus for the BOJ, signalling businesses are increasingly passing higher costs on to consumers in areas such as accommodation and eating out. According to the latest Reuters survey of BOJ watchers, most economists now expect the next 25bps rate hike to occur in early 2026, with January emerging as the most likely timing.^[12]

In Europe, most attention was on the Bank of England (BOE), which kept interest rates unchanged at 4.25%.^[13] The vote was more divided than economists had anticipated, with six members opting to maintain rates and three favouring an immediate 25bps cut, compared to expectations of a 7–2 split.

The division within the committee reflects the challenge of balancing a weakening labour market and sluggish economic growth, highlighted by May retail sales, which suffered the sharpest fall since 2023.^[14] The Office for National Statistics said the drop was driven by weakness across the board. In the face of persistent geopolitical risks and associated inflationary pressures, the overnight interest rate swap market is pricing two further 25bps cuts by the BOE this year.^[15]

Fed remains hawkish

In the US, the Federal Reserve delivered a hawkish hold for the fourth consecutive meeting, keeping the federal funds rate unchanged at 4.25–4.50%, as widely expected.^[16] The updated dot plot indicates a more cautious stance on rate cuts, with the number of Fed officials projecting no cuts this year rising from four in May to seven in June. Two members shifted from expecting one cut to none, and one moved from two cuts to none, resulting in a distinctly bimodal distribution for 2025: either zero or two cuts.

Staff projections provided no sign of an administration-driven “MAGA” boost; instead, they point to potential stagflation. Growth was revised lower for 2025 (1.4% vs. 1.7%) and 2026 (1.6% vs. 1.8%), while inflation was revised higher across the forecast horizon, remaining above the Committee’s 2% target. Consequently, unemployment projections were revised up as well.^[17]

In his press conference, Fed Chair Jerome Powell cautioned that the inflationary effects of tariffs could prove more persistent than previously anticipated. The committee now sees the fed funds rate at 3.9% by the end of 2025, 3.6% by end-2026, and 3.4% by end-2027 — implying 50bps of cuts in 2025, followed by 25bps each in 2026 and 2027.^[18]

Tolerance or immunity?

One school of thought for explaining the lack of reaction in markets, despite the escalation in geopolitical tensions, is that investors have developed a higher tolerance — or even a degree of immunity — to shocks given how frequent and varied such disruptions have been in recent years.

Since 2020, markets have had to weather COVID-19, the Taliban’s takeover of Afghanistan in 2021 (and chaotic US withdrawal), while 2022 saw Russia’s invasion of Ukraine, the UK’s mini-budget fiasco, turmoil in China’s property sector, alongside a global inflation surge that triggered aggressive rate hikes worldwide.

More recently, in 2023, we saw the Israel–Hamas war and Red Sea shipping disruptions, and a regional banking crisis in the US, marked by the collapses of Silicon Valley Bank and Signature Bank. In 2024, markets faced the collapse of Assad’s Syria and renewed political uncertainty following Trump’s re-election.

Taking a more quantitative approach with a longer time series going back to 1939, the median S&P 500 decline during major geopolitical events is about 6.1%, with markets typically taking 17 days to reach a bottom and then fully recovering over the following 16 days. Historical examples that may have relevance today include the Cuban Missile Crisis (7 days to bottom, 9 days to recover, 6.6% drawdown), President Clinton’s impeachment (6 days to bottom, 5 days to recover, 3.9% drawdown), and Brexit (14 days to bottom, 9 days to recover, 5.6% drawdown).^[19]

A closer look at the data shows broader, more prolonged market declines and extended recovery periods typically occur when a geopolitical shock causes a supply-side disruption. A relevant historical parallel is the First Gulf War in 1990-91, when Iraq’s invasion of Kuwait removed a significant volume of oil exports from the market, leading to a much larger drawdown (15.9%), a deeper bottom reached in 50 days, and a slower recovery over 87 days.

At present, however, this does not seem to be on the cards, as neither Iran nor Israel appears to be targeting critical energy infrastructure, while oil tanker transits through the critical Strait of Hormuz have remained largely steady.^[20]

An alternative line of thought — slightly more unconventional — is that President Trump and his impromptu and unpredictable messaging remain the focus, diverting investors’ attention away from central banks and international diplomats. Last week, President Trump signalled he would give diplomacy a chance before deciding whether to strike Iran, saying he would make his decision within the next two weeks^[21]. Despite this claim, over the weekend the US launched strikes on three nuclear sites in Iran.

In line with President Trump being the main show in town, perhaps the most underpriced risk currently is the cluster of deadlines at the beginning of July, These include a diplomatic solution for Iran, the self-imposed July 4 deadline for the final passage of the US tax bill, the July 8 expiry of the 90-day reprieve on reciprocal tariffs, and the July 9 expiration of the EU’s 50% tariff reprieve.

It is never advisable to box yourself into a corner with multiple difficult deadlines. Just like juggling too many balls at once, eventually, you’re likely to drop one.

Chart of the Week: Japanese inflation vs Swiss deflation

Source: Statistics Bureau of Japan, Consumer Price Index, June 20, 2025; Federal Statistics Office of Switzerland, Consumer Prices, June 3, 2025. For illustrative purposes only.

References

[1] CBOE, 'Chicago Board Options Exchange Volatility Index,' as of June 20, 2025
[2] Oilprice.com, WTI Crude, as of June 20, 2025
[3] European Council, ‘G7 Leaders’ Joint Statements - Kananaskis, Canada,’ June 17, 2025
[4] Banco Central do Brasil, ‘Copom increases the Selic rate to 15.00% p.a,’ June 18, 2025
[5] Norges Bank, ‘Rate decision June 2025,’ June 18, 2025
[6] Riksbank, ‘Monetary policy decision,’ June 18, 2025
[7] Swiss National Bank, ‘Monetary policy assessment,’ June 19, 2025
[8] Bank of Japan, ‘Statement on monetary policy,’ June 17, 2025
[9] Ministry of Finance, ‘Announcement of 20-year JGBs to Be Issued in June 2025,’ June 17, 2025
[10] Reuters, ‘BOJ Governor Ueda's comments at news conference,’ June 17, 2025
[11] Statistics Bureau of Japan, CPI May 2025, June 20, 2025
[12] Reuters, ‘BOJ to postpone rate hike to Q1 next year, tiny majority of economists say: Reuters poll,’ June 11, 2025
[13] Bank of England, ‘Bank Rate maintained at 4.25%,’ June 19, 2025
[14] Office for National Statistics, ‘Retail Sales, Great Britain: May 2025 time series,’ June 20, 2025
[15] Bloomberg, World Interest Rate Probabilities,’ as of June 20, 2025
[16] Federal Reserve, ‘Federal Reserve issues FOMC statement,’ June 18, 2025
[17] Federal Reserve, ‘Federal Reserve Board and Federal Open Market Committee release economic projections from the June 17-18 FOMC meeting,’ June 18, 2025
[18] Federal Reserve, Press Conference, June 18, 2025
[19] Deutsche Bank, Geopolitical Bouncebacks, June 20, 2025
[20] Bloomberg, ‘Hormuz Tracker,’ June 20, 2025
[21] The White House, ‘President Trump Has Always Been Clear: Iran Cannot Have a Nuclear Weapon,’ June 17, 2025

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of June 23, 2025, and may change without notice. All data figures are from Bloomberg, as of June 20, 2025, unless otherwise stated.

--------

Important Information

Muzinich & Co.”, “Muzinich” and/or the “Firm” referenced herein is defined as Muzinich & Co. Inc. and its affiliates. This material has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall. Emerging Markets may be more risky than more developed markets for a variety of reasons, including but not limited to, increased political, social and economic instability, heightened pricing volatility and reduced market liquidity. Any research in this document has been obtained and may have been acted on by Muzinich for its own purpose. The results of such research are being made available for information purposes and no assurances are made as to their accuracy. Opinions and statements of financial market trends that are based on market conditions constitute our judgment and this judgment may prove to be wrong. The views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity, they are for information purposes only. Any forward-looking information or statements expressed in the above may prove to be incorrect. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation that the objectives and plans discussed herein will be achieved. Muzinich gives no undertaking that it shall update any of the information, data and opinions contained in the above.

United States: This material is for Institutional Investor use only – not for retail distribution. Muzinich & Co., Inc. is a registered investment adviser with the Securities and Exchange Commission (SEC). Muzinich & Co., Inc.’s being a Registered Investment Adviser with the SEC in no way shall imply a certain level of skill or training or any authorization or approval by the SEC.

Issued in the European Union by Muzinich & Co. (Ireland) Limited, which is authorized and regulated by the Central Bank of Ireland. Registered in Ireland, Company Registration No. 307511. Registered address: 32 Molesworth Street, Dublin 2, D02 Y512, Ireland. Issued in Switzerland by Muzinich & Co. (Switzerland) AG. Registered in Switzerland No. CHE-389.422.108. Registered address: Tödistrasse 5, 8002 Zurich, Switzerland. Issued in Singapore and Hong Kong by Muzinich & Co. (Singapore) Pte. Limited, which is licensed and regulated by the Monetary Authority of Singapore. Registered in Singapore No. 201624477K. Registered address: 6 Battery Road, #26-05, Singapore, 049909. Issued in all other jurisdictions (excluding the U.S.) by Muzinich & Co. Limited. which is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ, United Kingdom. 2025-06-20-16416