Financial markets hold their nerve in the face of growing geopolitical uncertainty
June 24, 2025
By Mario Catalá
The global economy is going through a highly complex moment, marked by a combination of structural and conjunctural factors that are redefining expectations for growth, inflation and monetary policy. However, despite the recent escalation of war between Israel and Iran, and especially after the US military intervention this past weekend, financial markets have shown remarkable resilience, as at the time of writing most global indices remain stable.
However, the latent risks are still significant, and proof of this was the recent decision by the US Federal Reserve not to move interest rates, keeping them in the 4.25%-4.50% range for the fourth consecutive meeting. Powell once again stressed the need to maintain a restrictive monetary policy in an environment of a strong labour market, but with increasingly active inflation risks. In fact, the Fed updated its inflation forecasts for the coming years, rising from 2.7% to 3.0% for 2025 and from 2.2% to 2.4% in 2026 (with similar rises also at the underlying level), mainly due to the medium-term effect of the tariffs imposed by Trump. True, they also revised down their growth expectations for the US from 1.7% to 1.4% in 2025 and from 1.8% to 1.6% in 2026, which is one of the main reasons why several rate cuts are still expected before the end of the year. But this context is now compounded by the possible closure of the Strait of Hormuz by Iran, with major implications for the price of crude oil, and therefore for inflation, which would undoubtedly present a new headache for the Fed.
In the short term, the US economy maintains a robust pace of growth, with the Atlanta Federal Reserve estimating GDP growth of 3.4% for the second quarter of 2025, with consumer confidence rebounding in May to 98 points from 85.7 in April. However, some indicators are starting to show weakness: retail sales fell by 0.9% in May, and industrial production declined by 0.2%. The unemployment rate remains at 4.2%, but it should be noted that although jobs are still being created, they are being created at a slower pace.
In the euro zone, growth is being maintained thanks to the fiscal impulse, especially in Germany, where the new government has announced a significant increase in public spending. Inflation remains contained (further correction in May of the headline CPI from 2.2% to 1.9%), which has allowed the European Central Bank to maintain the cycle of rate cuts. At its last meeting, the ECB cut rates again by 25 basis points, leaving the deposit facility rate at 2%. After the subsequent press conference, it was inferred that the time has come for the ECB to pause in the easing of monetary policy while it analyses the targets achieved, although the market is discounting at least one more cut before the end of the year.
China surprised with solid growth in retail sales (+6.4% year-on-year in May) and an industrial production that, although lower than expected, continues to expand. China’s economy continues to rely on domestic consumption, making it less vulnerable to the global slowdown.
Despite the conflict between Israel and Iran, and the recent US intervention, risk assets have held up well. The S&P 500 and the Nasdaq closed the previous week virtually flat, while the European benchmark, the Eurostoxx 50, was down just 1%.
Oil has been the asset that has been most affected by the conflict, rising more than 10% since the start of the Israeli attacks, and accumulating gains of more than 25% since the lows of the year, when it traded below USD 60 per barrel (currently at USD 77.2/b). The direct confrontation between Israel and Iran has revived fears about global energy stability. Although critical infrastructures and traffic in the Strait of Hormuz have not been affected so far, the risk of an oil supply disruption remains, especially after the active involvement of the United States in the conflict has been confirmed. The Strait of Hormuz is very important, as around 25% of global shipments of petroleum products pass through it, so at least in the short term, and until alternative routes and suppliers are found, a significant rise in the price of oil is to be expected, which would lead to an increase in global inflation levels.
At this hour, the Iranian parliament has approved the closure of the pipeline, but for the closure to take place effectively, the approval of the Iranian security council is necessary and after that, the last word is left to the supreme leader Khamenei.