Markets and indeed clients have had a lot to endure over the last few weeks. Trump may have described his “Liberation Day” as “one of the most important days in America's history” – a declaration of the country's economic independence. But the backlash of reciprocal tariffs on the US levied by numerous countries the world over severely impacted equity and bond markets. The result was tumbling stock markets – the S&P 500 Index, for example, fell by some 12% over the following six trading days.
The corollary of this was a significant rise in market volatility: the CBOE VIX Index skyrocketed from 21.51 to 52.33 over the same period. None of this was particularly easy for Federal Reserve Bank Chair Jerome Powell, who declined to commit to any rate cuts in 2025. Nor did it much to soothe the already hostile relationship between Trump and Powell.
Days later, a 90-day “tariff truce” was announced, leading to reciprocal announcements from various governments and an immediate relief rally in the stock markets. In fact, the S&P 500 Index recouped all of its losses.
This Trump-induced instability has impacted the US bond market: long-dated bonds have taken a bruising across the board. UK gilts and Japanese bonds have reacted similarly – yields have been repriced upwards in response to fiscal stress, rather than growth optimism.
In the UK, the 30-year gilt yield now tops the charts in the developed world economies at 5.36%, a full 36 bps above the equivalent US Treasuries. That spread is most definitely not a reward for economic outperformance. In reality, it reflects concerns about the UK's fiscal sustainability.
Like the Fed, the Bank of England will be keeping a watchful eye on the bond market, mindful of the fact that it will most likely need to slow down the pace of gilt sales. This suggests that interest rate cuts alone will not be enough to counteract upward pressure on long yields.
Nevertheless, the global equity markets appear to be brushing aside any real concerns over rising bond yields, levels of debt and uncertainty around tariffs and the escalation of the war in Ukraine. For now, at least. In fact, last week the MSCI All Country World Index – a proxy for global equities – reached a new all-time high. Even the MSCI All-Countries World ex U.S. Index has finally hit a new all-time high for the first time since 2007.
This has been helped by the transitional progress of the Japanese stock market – once you have excluded the US, it represents the biggest weighting in the developed world indices. Just think: the NIKKEI 225 spent decades in the wilderness; now… it is only 11% away from hitting a new all-time high.
This was not what people were expecting from Trump’s tariff announcements and the associated challenges that have ensued. But there you have it – barely two months after the market hit its recent low on 8 April, stocks on Wall Street have made a remarkable recovery: the S&P 500 Index has gained nearly 20%, and is now just 3% below its record high.
Wall Street nevertheless trails behind some of its international large-cap peers. This is because global asset allocators have shifted some of their assets away from the US stock market in recent months. A combination of valuation concerns, geopolitical tensions and changes in the economic outlook have spooked some investors: regions such as Europe and the emerging markets have benefited from the redeployment of capital.
Nevertheless, the major US stock indices have closed higher for the second week in a row. Small cap stocks have led the way; and at sector level, information technology stocks have outperformed others, due in part to upbeat sentiment around AI-related stocks in the wake of several positive corporate earnings reports.
And the headlines have been full of news of positive trade discussions, further boosting investor sentiment. Indeed, the news that Trump and Xi Jingping took part in a constructive telephone call also helped investor confidence, which was further cemented by a social media post from the former.
But as far as economic data is concerned, last week's highlight was arguably the closely observed US non-farm payroll numbers report, which seemed to indicate that the labour market is cooling, but more slowly than many were predicting.
Furthermore, according to a report from the Institute for Supply Management, US manufacturing activity contracted for the third month in a row in May. Last month’s Purchasing Managers’ Index fell short of market estimates, and was its lowest since November 2024, with a reading below 50%, signalling contraction.
Elsewhere in Europe, as expected, the European Central Bank trimmed its deposit rate by a quarter point to 2%, its lowest level since 2022. ECB President Christine Lagarde said that the bank had “nearly concluded” the latest policy cycle, which has involved eight interest rate cuts since July 2024. Current policy was in a “good place”, and rate setters were not on any “pre-set path”, and would continue to be guided by economic data. A further rate cut is expected by the market in September as the European Central Bank assesses the risk to growth and inflation posed by trade policy uncertainty.
In the UK, Bank of England Governor Andrew Bailey (who voted for a quarter-point rate reduction in May) stressed that the path for interest rates “remained downwards”. How far and how quickly they are lowered is now somewhat more uncertain. Further reductions, when they come, will be directed by global trade policy and domestic issues closer to home.
Chinese export growth missed market expectations for May, dragged down by a sharp decline in shipments to the US. However, analysts now believe that the positive effects of the Beijing-Washington truce will be visible in the June data. The superpowers have both been playing a high-stakes game in the tariff war in recent months, and the effects have now fed through into the recent economic data. Both Trump and Xi Jinping appear to be mellowing in their approach.
Summer is not normally a testing time for the markets or investors. But this year might be different. After a solid run in the markets – supported by resilient fundamentals – global investors may now have to contend with a summer of change. From potential trade developments and headlines about tariffs to evolving Fed policy and fiscal debates, the weeks and months ahead may dampen the recent momentum and shape the markets’ direction for the second half of the year.
Further headline noise will therefore characterise the months ahead. That said, even given the “known unknowns” regarding trade, the bull market appears to be underpinned by solid fundamentals. Easier fiscal policy and the anticipated Fed rate cuts may help reaccelerate growth in 2026, while political and economic realities may help prevent the US administration from adopting an overly aggressive stance on trade.
We continue to support a slight preference for holding quality equities over bonds in our portfolios. That said, bonds may still play a part in smoothing out volatility. Some concerns remain over 30-year bond yields breaching the 5.5% mark. This will doubtless create a measure of nervousness among traders in the global equity markets. Nevertheless, we believe that a balance between owning growth and value is warranted. The recent corporate earnings season was a good reminder of the corporate earnings power of those mega-cap tech stocks, even though ownership in the marketplace continues to broaden out both geographically and sectorially.
