20 June 2025: Weekly Update – Middle East Escalation, Central Banks and AI Deflation

It is the energy sector that serves as the primary transmission mechanism to financial markets from this conflict and whilst Brent crude has climbed to a four-month high it remains below levels a year ago and has not approached a point that would signal widespread economic disruption. The critical Strait of Hormuz, through which approximately a fifth of global oil and gas flows, remains operational despite Iranian parliamentary votes to potentially block the waterway.

Central banks across major economies adopted a notably cautious stance this week, with scheduled monetary policy decisions reflecting the continuing delicate balance between supporting economic growth and managing inflation expectations. The US Federal Reserve maintained its benchmark rate at 4.5% while projecting two quarter-point cuts for the remainder of 2025, though updated forecasts reflected the adverse effects of recent tariff policies. The Bank of England similarly held rates at 4.25% as UK inflation remained elevated at 3.4% in May, well above the bank’s 2% target. Meanwhile, the Swiss National Bank cut rates to zero in response to deflationary pressures and franc appreciation, marking a return toward the negative rate territory it maintained from 2014 to 2022. The Bank of Japan kept rates steady at 0.5% while announcing plans to slow the pace of bond purchase reductions, signalling continued caution in unwinding its expansive monetary stimulus.

Whilst energy prices and trade policy uncertainty have been underlying drivers of inflation in 2025, the artificial intelligence theme is a secular wave of disruption travelling in the direction of deflation. Amazon announced significant workforce reductions this week as it implements AI across inventory management, demand forecasting, and customer service operations. Acknowledging that while AI adoption would create some new roles, the company expects an overall decline in corporate workforce numbers over the coming years as efficiency gains materialize. This reflects broader industry trends towards automation. Similarly this week, The Telegraph newspaper reported job cuts and the scaling back of graduate recruitment programs across the Big Four accountancy firms as they lean on artificial intelligence to do entry-level work. This represents a broader trend across sectors for reduced graduate recruitment coinciding with increased AI adoption.

This week we continued to make proactive adjustments within the T. Bailey Multi-Asset funds to assess areas of risk and diversify accordingly. Having recently reduced exposure to High Yield debt in the T. Bailey Multi-Asset funds, where tight spreads have raised valuation concerns, we have now allocated to the newly launched Man Credit Opportunities Alternative Fund. This fund employs a more concentrated, actively managed approach with a strategy designed to capitalise on both the long and short sides of the credit market and with the flexibility to take net exposures ranging from negative to positive depending on where the best risk-adjusted opportunities lie. We consider such an approach to be more appropriate for a market where just being in it offers little incremental yield.