The main points of the allocation meeting
- Iran and the United States have signed a preliminary peace agreement. The agreement includes the reopening of the Strait of Hormuz and a 60-day negotiation period during which the parties will seek to resolve disputes related to Iran’s nuclear program and reach agreement on a final peace settlement. Around one-fifth of global oil and liquefied natural gas shipments normally pass through the Strait of Hormuz, meaning that the resumption of maritime traffic through the strait would support economic growth and ease inflationary pressures, particularly in Europe and energy-importing Southeast Asian economies. However, traffic through the strait is expected to normalize only gradually rather than immediately after the formal signing of the agreement on Friday. Clearing naval mines will take time, and some shipping companies may continue to avoid the area due to security concerns until they are convinced that the agreement will hold.
- The agreement between Iran and the United States has pushed oil prices lower and lifted equity markets. Brent crude has fallen approximately 30% from its early-May peak of USD 115 per barrel to around USD 80 per barrel. Before the war began, Brent traded at around USD 70 per barrel. Equity market gains have been particularly strong among semiconductor companies. The Philadelphia Semiconductor Index (SOX) has risen approximately 10% over the past week. South Korea’s KOSPI Index has also risen almost 15% over the same period, driven by semiconductor giants SK Hynix and Samsung. The rapid recovery of semiconductor stocks from their pullback two weeks ago highlights that artificial intelligence remains the most important driver of equity market growth, but also its most significant source of risk.
- The Federal Reserve is expected to keep its policy rate unchanged at 3.50–3.75% at today’s meeting. While the war with Iran has increased inflation, economic growth and labor market conditions have remained strong. Consensus forecasts expect the U.S. economy to grow by 2.2% this year. May’s employment report once again exceeded expectations and marked the third consecutive strong labor market report. As a result, market expectations for Federal Reserve rate cuts this year have disappeared, and Fed funds futures now price in one rate hike by the end of the year. Today’s meeting is also the first under the leadership of the new Fed Chair, Kevin Warsh, meaning that particular attention will be paid to his comments and communication style. We do not expect Warsh to provide forward guidance on future rate decisions, however, and instead expect him to emphasize that policy decisions will remain data-dependent.
- We overweight equities and underweight money markets. Within equities, we overweight EM equities, underweight European equities, and remain neutral elsewhere. In fixed income investments, we overweight high yield corporate bonds and underweight government bonds, while remaining neutral on emerging market bonds and investment grade corporate bonds.
