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Iraq casts global shadow

Buoyed by encouraging economic data from the US, many leading equity indices started June relatively strongly but investor sentiment was then undermined by reports of escalating conflict in Iraq. Share prices declined and the price of oil surged to its highest level since September 2013.

Europe attracted much of the limelight early in the month, following the news the European Central Bank had cut the eurozone’s benchmark interest rate to 0.15% and announced a negative deposit rate for banks in a bid to encourage them to lend. The eurozone’s economy grew at a quarterly rate of just 0.2% during the first three months of 2014 and the region’s rate of inflation fell to 0.5% in May, remaining unchanged in June. Germany’s Dax index and France’s CAC 40 index fell 1.1% and 2.1% respectively over the month.

In the US, although the benchmark Dow Jones Industrial Average index reached record levels during June, it ended the month only 0.7% up on the end of May. The country’s economy contracted by 2.9% during the first quarter of 2014 although much of that fall was caused by exceptionally wintry weather and growth is widely expected to have rebounded during the second quarter. The US Federal Reserve trimmed its forecast for economic growth this year to a range of 2.1% to 2.4% but expects expansion of as much as 3.2% next year.

Meanwhile, in the UK, the Bank of England revealed measures designed to curb higher-risk mortgage lending. In particular, lenders will not be allowed to lend more than 15% of residential mortgages at loan-to-income ratios at or above 4.5 and they will also have to assess whether potential borrowers will be able to cope with higher interest rates. Bank of England governor Mark Carney indicated a “new normal” for the UK’s base rate could eventually be around 2.5%. In the markets, while IPO activity remained strong in the UK during June, the FTSE 100 index dropped 1.5% over the month.

Unlike most other major equity markets, Japan’s benchmark Nikkei 225 index rose strongly during June, posting a monthly increase of 3.6%. The country’s economy expanded more strongly than previously calculated during the first quarter of 2014, aided by robust levels of business investment. Consumer prices rose at an annualised rate of 3.4% during May, boosted by an increase in consumption tax that took effect in April.