After a very turbulent second quarter, equity markets have been very resilient with the Trump tariff storm still rumbling on … at the time of writing.
The U.S. administration’s ‘One Big Beautiful Bill’ was squeezed through Congress just ahead of the President’s 4th July deadline. The bill, supposedly aimed at reducing the deficit, extends tax cuts introduced in Trump’s first term and includes a potential $5tn increase to the federal debt ceiling.
We seem unable to move away from the topic of tariffs which has rumbled on since ‘Liberation Day’ on 2nd April. Donald Trump announced 25% trade tariffs on major trading partners Japan and South Korea, as well as levies at varying levels on other countries, including Canada, Thailand, and South Africa.
In addition to the country-specific tariffs, President Trump also announced an upcoming 50% tariff on copper. This led to sharp spikes in US copper prices.
Tensions were raised by the strikes on Iran by Israel and subsequently the US. This caused oil prices to spike to nearly $74 a barrel, highs not seen since January this year; however, they quickly receded back to $64 and have climbed steadily up to nearly $68. This is important as there were concerns the spike in oil prices could be very bad news for inflation, which all the major economies are trying to reduce.
The latest UK GDP shrank by 0.1% in May, falling short of analysts’ expectations for 0.1% growth. This follows a 0.3% decline in April, marking two consecutive months of contraction. The downturn was primarily driven by reduced output in both the production and construction sectors. Over the rolling three-month period, GDP expanded by 0.5% sequentially, coming off a 0.7% increase in the three months through April.
Given the row back on welfare cuts the UK Government now find themselves with a £6.25bn shortfall, which has raised speculation on a wealth tax and other tax rises coming down the line in the autumn. The Chancellor has also been forced to drop her plans to limit cash ISAs; an idea intended to shift savings into stocks and shares.
Within Europe, the Sentix index for the Eurozone improved to 4.5, the highest level since early 2022, as sentiment continues to bounce back from their Liberation Day-induced slump. Germany saw similar gains as investors continue to react positively to the government’s fiscal plans. German’s industrial production increased by 1.2% in May after falling 1.6% in April.
China saw producer prices fall 3.6% in June from a year earlier and this marked the 33rd month of factory deflation as well as the biggest drop in 2 years. China is still adjusting to the effects of the fall out from Trump’s tariff stance. However, Chinese exports rose 5.8% year on year, beating expectations as companies used a tariff truce with the US to ship goods ahead of August deadline. Tariffs and geopolitical tensions will likely be a drag by late 2025 unless offset by new stimulus and diversification.
Overall, global markets have remained remarkably stable considering the volatility over the second quarter, with wars, tariffs, inflation and economic activity all being added into the mix. Market volatility has dropped to near its lowest level of the year as Trump’s tariffs melt away, despite his trade war with the rest of the world.
Many indices, including the FTSE 100 (which has reached a record high of 9,000), are performing extremely well considering the backdrop of tariffs and geopolitical tensions. However, the potential for interest rates to continue their path lower has helped boost some global equity markets to fresh highs.
There is still the big sticking point with inflation which does not seem to be falling as fast as hoped. The UK figure stands at 3.4% (the highest for 18 months), Europe is fairing much better with 1.9% (in line with European Central Bank target), however, the US has jumped to 2.7%, and this could go higher as the effects of the tariffs bite, this will put pressure on central banks to perhaps lower expectations for interest rate cuts for the remainder of the year.
Diversification has never been more important – but it is no longer a simple case of dividing the investments between fixed income and equities. As interest rates and bond yields diverge, the correlation between these traditional portfolio building blocks has risen. That means fund managers must work harder to create balance and enjoy a smoother ride with less volatility which is no easy feat in these turbulent times.