Markets: Quarterly review Q2-2025:

Q2-25 was dominated by uncertainty as President Trump launched his trade war against friends and foes alike when he unveiled his ‘Liberation Day’ tariff blitz. Consequently, we saw a sharp rise in volatility throughout the quarter as his rhetoric and threats flip-flopped on an almost daily basis. We saw global equity and fixed income markets increasingly anxious over inflationary risks, recession risks, rate expectations, and US debt sustainability; causing investors to flit between each and all of these; depending on the latest flavour of ‘tweet’ on the day. The announcement of a 90 day pause mid-April did help calm some of the anxiety for global markets as investors attempted to navigate this ‘new and chaotic’ universe. Global markets did recover somewhat through the latter half of the quarter as trade talks progressed as the July 9 Trump-deadline ticked closer for most countries

US equity markets did finish Q2-25 with some gains, helped largely by tech related sectors and relatively robust Q1-25 corporate earnings despite the supply-chain chaos we saw through April. While US economic activity remained somewhat resilient, we saw GDP fall by 0.5% for the quarter; likely caused by importers forward-buying inventory, a devaluing US dollar, and broadening concerns from companies and consumers that these tariffs could become higher and stay a good deal longer at those levels than initially expected. The Trump administration unveiled its intentions to pressure healthcare companies for lower drug prices, resulting in a noticeable decline in valuations across that broad sector. Contrary to expectations, employment data remained consistent through the quarter whereas job-openings saw a meaningful decline through the quarter. In June, President Trump’s tax and spending legislation was unveiled to the House and Congress aiming to increase defence spending; cut or substantially reduce budget allocations for welfare related programmes; a hefty increase to the debt-ceiling; and extend or make permanent many 2017 tax cuts. Collectively this Bill is expected to add +$400Bn each year to US Federal debt, in addition to the accelerating annual deficit of near $2Tn for 2025.

EU markets fared well through Q2-25 with strong gains as global investors reduced their over-weight positions from US markets. The ECB cut rates twice by 0.5%, citing that further cuts were now less unlikely after inflation appeared to now be under control at 1.9% in May. The NATO summit agreed to lift defence spending substantially, helping industrials outperform. Consumer discretionary, energy and healthcare sectors underperformed as markets become cautious in the face of the impending Trump trade war.

UK markets were largely positive for the quarter on the back of a 0.25% rate cut to 4.25% by the BoE despite inflation remaining above the 2% target at 3.4% for May. The UK announced a ‘trade deal’ with Trump yet few details came with that announcement. The UK Treasury continues to face mounting challenges as the economy remains sluggish amid rising welfare and living costs. Telecommunications, industrials, utilities and real estate outperformed whereas healthcare and energy underperformed.

Japanese markets delivered strong gains for Q2-25 with the Nikkei 225 +13.6% and the Topix +7.5%. Market sentiment fell meaningfully early April after Trumps’ self-styled trade war began but recovered somewhat after the ‘pause’ and subsequently gained momentum as recession fears abated on the back of trade talks with the US in addition to China and several other key trading partners. Japanese corporates announced strong performance through the quarter on the back of buybacks and improved dividends.

Emerging markets outperformed Q2-25 on the back of a weakening US Dollar and recovering economies to deliver double-digit gains in many cases, and despite Trumps’ tariff threats. Brazil outperformed as it raised rates twice, strengthening the Real further against the US Dollar. Taiwan made strong gains on the back of optimistic AI trends, and a strengthening Taiwanese Dollar as exporters sold US assets. South Korea outperformed as it elected a new president thereby reducing the prevailing political instability. China was marginally positive for the quarter as global investors and the domestic economy remained cautious in the face of the ongoing US/China trade war. Saudi Arabia was marginally negative on the back of the unpredictable Middle East conflict. India underperformed as investor momentum weakened on the back of high valuations and growth concerns much related to tariff impact risks. Thailand underperformed on the back of tariff risks, declining tourist numbers, and the prevailing political instability. 

Global bond markets saw a mixed and volatile Q2-25, pushed-and-pulled by geopolitics, tariff threats, recession risks, ongoing conflicts in Europe and the Middle East, US debt sustainability, and inflation-driven rate trends. Trumps’ ‘Liberation Day’ tariff announcements dominated debt markets which in turn shifted or over-turned the broader fiscal and monetary policy influences for all Central Banks, weakening US fixed income markets as global investors’ sentiment for US debt deteriorated immediately. That deterioration forced Trump to invoke his 90-day pause (now limited to only 10% tariff on all imported goods) which in turn allowed some breathing room for discussions and negotiation – albeit mostly skewed toward US interests. Investor concerns around US debt sustainability and accelerating annual deficits were further amplified after Moody downgraded the US sovereign rating to Aa1. By indirect association, the 30-year Japanese bond yield also spiked to an all-time high since Japan is the largest holder of US debt, and in addition to its own underlying structural imbalances between supply and demand. Canadian bonds suffered too on the back of economic and fiscal uncertainty in the face of US tariffs. Australia moved positively on the back of weakening economic growth, easing inflation, and rate-cut expectations. Global credit markets largely outperformed through the quarter on the back of relatively low issuance and lower volatility (than Sovereigns). Corporate bonds in most markets (IG and HY) outperformed for similar reasons. Indeed, Emerging Markets HY outperformed Corporates on the back of the weaker US Dollar falling to a 3-year low. Given these many ‘dynamics’, investor sentiment trended noticeably toward short-duration debt and away from long-dated debt, causing most Sovereign debt yield-curves to steepen meaningfully.

Commodity markets generally declined marginally through Q2-25 on the back of concerns driven by tariffs, geopolitics and rising economic risks. Energy underperformed on the back of disruption risks for shipping and oil supply from the Middle East. Soft commodity sectors were mixed on the back of climate-change impacts, with cocoa and livestock outperforming. Industrial and precious metals outperformed.

Despite the US Senate passing the Genius Act in the quarter, digital assets largely remain a highly speculative asset arena. This US law has provided some clarity for stablecoin regulatory frameworks that should in time enable some adoption of blockchain technologies for some of the largest financial and tech institutions globally (Stablecoins are a type of cryptocurrency whose value is pegged to another asset to maintain a more stable price). Both Bitcoin and Ethereum gained around 30% for the quarter thereby recovering some of Q1-25 losses; whereas most other ‘coins’ saw marginal gains or losses

Andy Blandford