Devon Funds Morning Note - 25 June 2025

Wednesday 25th June 2025

Wielding the Stick

Global

US stocks surged on Tuesday while oil prices fell heavily again as investors took the view that the ceasefire between Israel and Iran will be an enduring one. After being frustrated by some initial breaches, and also while dropping an “F-bomb,” Donald Trump proclaimed the ceasefire was still in effect. The President will be even less enamoured with Jerome Powell who signalled to policymakers on Capitol Hill that the central bank was in no rush to cut rates. The President has said on social media that the Fed Chair was a “very dumb, hardheaded person” and that the US will “be paying for his incompetence for many years to come.” Markets ignored the theatrics around monetary policy setting, and focussed on the fact that Iran and Israel have downed arms for now. The S&P500 gained 1.1% (and is now less than 1% from its record high), the Dow Jones rallied 1.2%, and the Nasdaq leapt 1.4% (the Nasdaq100 hit a record high). WTI oil fell another 4% to US$65. Chipmakers rallied as did travel stocks, but buying was broad based. Broadcom, IBM and Microsoft hit record highs, but so too did JP Morgan Chase, Netflix, and cruise operator Royal Caribbean. Tariffs are though still proving very relevant - after the bell FedEx fell 5% after delivering a disappointing outlook.

There remains plenty of scepticism from some quarters on claims that peace has been restored in the Middle East. Investors are though giving the ceasefire the benefit of the doubt, and have been relieved by the muted retaliation by Iran, and a de-escalation of tensions. After using a stick, the US has also extended a carrot to Iran – Trump said on Tuesday that China can keep buying oil from Iran. He added “Hopefully, they will be purchasing plenty from the US, also. It was my Great Honor to make this happen!”

Focus on Tuesday also shifted back somewhat from the paused war in Iran to the state of trade frictions, and Jerome Powell’s comments on the state of play. The Fed Chair reaffirmed to the House Financial Services Committee that central bank officials were adopting a wait to see how Trump’s tariffs impacted inflation. He suggested that inventory accumulated before the tariff implementation was still “being burned off” and inflation related to the duties “just isn’t showing up yet” but expects it to do so going forward, even if the quantum is uncertain. In the meantime, he said a cautious approach was afforded by strong economic growth and a labour market around full employment.

Powell said the President’s personal attacks were not creating any pressure, and that officials were simply “doing our jobs.” Trump meanwhile continued to apply the stick to the Fed and Powell on social media, saying Europe has had 10 cuts [it’s actually 8 if we are counting], we have had ZERO [none this year, but there have been 100bps of cuts since September last year]. No inflation, great economy – we should be at least two to three points lower. Would save the USA 800 Billion Dollars Per Year, plus.”

Trump also took time to have a pop at lawmakers, telling Senators “lock yourself in a room if you must” to get his “big, beautiful bill” across the finish line before July 4. It would be safe to assume some political fireworks if this doesn’t happen. There is meanwhile another debate going through the House that the President’s order for strikes against Iran (without notifying Congress) over the weekend were unconstitutional, given the US was not at war.

US consumers meanwhile appeal to be suffering some wear and tear amidst multiple layers of economic uncertainties. The Conference Board’s Consumer Confidence Index fell 5.4 points to 93 for June, below estimates for 99.5. Consumers’ assessments of the present situation and their expectations for the future both deteriorated, as did current business conditions. Their appraisal of current job availability weakened for the sixth consecutive month but remained in positive territory, in line with a still-solid labour market. The declines were seen across all age groups and political affiliations.

Consumers are being selective, but are still spending, including on experiences. Cruise ship operator Carnival reported stronger than expected quarterly revenues of US$6.33 billion, and raised guidance for a variety of metrics. Net income rose to US$565 million, up massively from US$92 million a year ago, and US$185m higher than what the company forecast in March. The company raised full year net income guidance by US$200 million, up 40% from the 2024 performance. Carnival shares leapt 7% in the US, and soared 11% in London.

Tariffs are though expected to extract a toll elsewhere. FedEx exceeded earnings estimates but forecast a worse-than-expected profit for the current quarter. Parcel demand remains soft amid uncertainty over global trade. FedEx refrained from a providing a full year forecast, with management saying “We just simply cannot predict how that is going to play out.”

In the UK, the FTSE100 was flat. The oil majors were down around 4%+, while banks and travel stocks rallied (British Airways owner IAG soared 6%). Data from the CBI showed that UK manufacturing output weakened in the three months to June. There is though some brightness about the outlook given the US-UK trade deal which mitigates tariff uncertainty, along with government commitments to defence spending, and large infrastructure investments planned – including British Steel's agreement to provide 337,000 tonnes of rail track for Network Rail.

Also investing in the UK is Big Tech. Amazon said on Tuesday that it plans to invest £40 billion in the UK over the next three years, including the development of four new fulfilment centres. Not as good news for UK shoppers - grocery price inflation has hit 4.7%, its highest level in 14 months. Demand-driving warmer weather has been a factor. Wimbledon isn’t here yet, but data showed that UK consumers bought 2,400 packs of strawberries every minute in the last four weeks. More exotic fruits have also been sought after sales of mangoes rose 27%.

Across in the Continent, the STOXX50 soared 1.4%. Carmakers and banks (Deutsche Bank surged 5.3%) were in demand. Spain has approved BBVA’s takeover of peer Sabadell, the country’s fourth-largest bank, with conditions, including the provision they operate as separate entities for at least three years. BBVA rallied 2.5%. Travel stocks soared – TUI (one of the world’s largest tourism groups) jumped 11% after announcing a deal to acquire a 20% stake in Swiss tour operator Bentour Reisen.

Defence stocks were on the back foot. Defence will be in focus at the Nato summit which is underway. The alliance’s Secretary General has praised Donald Trump for his actions against Iran and said he would be “flying into another big success.” The President has been critical of Nato members not paying their fair share, but countries across Europe are now ramping up their spending. Higher defence spending is meanwhile set to help euro zone economic growth rebound from 0.8% this year to 1.4% by 2027 according to S&P Global Ratings. The agency noted that public spending on infrastructure, strong private balance sheets, and cooling interest rates would also be tailwinds.

In Asia, markets rallied strongly amid the ceasefire and falling oil prices. The Nikkei surged 1.1%, the CSI300 rallied 1.2%, and the Hang Seng soared 2.1%.

New Zealand

The Kiwi market didn’t take back in the ceasefire rally, with the NZX50 closing down 0.5% to 12,467. Fletcher Building weighed, falling 3.6% after its investor day and the upping of impairment costs (see yesterday’s note). Time will tell if the highs are in for provisions and the lows for the share price. Management have a recovery plan and the company would benefit if the economy sees a cyclical upswing amid lower interest rates.

There is arguably need for more rate cuts amid a largely fragile (agri and tourism aside) economy. Employment confidence remains subdued. The Westpac-McDermott Miller Employment Confidence Index rose by 0.5 points to 88.8 in the June quarter. Pessimists outnumber optimists. The index has been essentially unchanged over the last year, and remains close to the lows seen after the first Covid lockdown in 2020. A perceived lack of job opportunities remains the key concern for New Zealand households according to Westpac.

Australia

The ASX200 was 1% higher, closing at 8,555, less than 40 points from the record high. The energy sector fell 4%, and utilities dipped 2%, but other sectors were in the green. The banks were higher, with CBA hitting a record high, but Westpac outperformed with a 2.6% gain. BHP rose 2.4% and Rio Tinto surged 3.1%.

Virgin Australia’s IPO got off to a strong start, soaring 11% on its listing price, and putting the airline’s collapse five years ago firmly behind it. A falling oil price helped the mood. Qantas jumped 2.6%. Another company having a positive debut was Greatland Gold with shares in the copper and gold producer soaring 11%.

Shares of Treasury Wine Estates eased 0.9% as the company said earnings growth at its flagship Penfolds business will fall to the “low to mid double digit” range, versus historic annual growth of 15%. Demand has rebounded in China, and it is investing in expansion there. Sales of luxury brands soared 34%, but those at lower-cost brands fell 50% during the half year. Wine drinkers are cutting back, mainly at the cheaper end of the market, with younger, health-conscious consumers prefer low-calorie, ready-to-drink spirits. This hasn’t deterred the company from trying to boost sales in the under A$15 a bottle market. Treasury Wines nonetheless reiterated broader full year earnings guidance to A$770 million, and is planning on buying back up to 5% of its shares.

Consumers are though flocking back to lower priced fast food it seems. KFC operator Collins Foods said lower interest rates were starting to help consumer sentiment, with same-store sales at KFC Australia up 4.9% in the first eight weeks of its new financial year. Collins delivered an 89% fall in full year profit, but has taken heavy impairments on its KFC Netherlands business (anti-American sentiment from local consumers has been just one factor) and is exiting Taco Bell in Australia amid intense competition. The shares though soared 17% on the news around KFC in Aussie and the view that the bottom may be in.

Corporate activity is alive and well with more M&A news. Xero has announced it has entered into a binding agreement to acquire 100% of US accounting and payments company Melio for US$2.5 billion in cash and scrip. Management see the acquisition as boosting the company’s growth plans in the US, where it struggled to gain market share against its larger rival, Intuit.

Monthly inflation data for May is due today. Expectations are for the CPI to come in stay at 2.4% annually.

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