Jun 4, 2025
Tariff Flip-Flopping: A Political Risk Repricing
The month of May was dominated by trade policy volatility, as President Trump reignited tariff threats, particularly toward the European Union, before softening his stance by extending negotiation deadlines. The uncertainty surrounding tariff implementation created distortions in supply chains and added complexity to corporate planning.
Many companies front-loaded exports—particularly from Asia—to the U.S. to pre-empt potential levies. This boosted near-term trade and production data but painted a misleadingly healthy picture of global demand. The longer-term concern remains whether this short-term lift is masking underlying fragility in global trade.
Inflation Softens on Lower Energy Prices
Headline inflation surprised to the downside across several regions in May, most notably in the U.S., largely due to a sharp drop in oil prices amid speculation over a potential OPEC+ supply increase. The decline offered some relief to consumers and helped stabilize bond markets. However, core inflation remained stubbornly high, reinforcing a data-dependent posture among central banks. In the U.S., the April PCE index—reported in May—came in cooler than expected, hinting at a possible near-term easing in inflationary pressures but not yet enough to shift policy expectations materially
Growth Holds Up, But Not for the Right Reasons
Global GDP data held up reasonably well in Q2 estimates, but much of the momentum appeared to stem from front-loaded trade activity rather than underlying strength in consumer or capital spending. In the U.S., capital goods orders registered a modest increase, though anecdotal evidence points to tariff-avoidance behaviour rather than the start of a genuine capital expenditure cycle
Chart 1: Global Economic Surprise Indices – Inflation and Growth
Index
Source: Bloomberg
Emerging Asia saw a short-term pickup in manufacturing exports, notably Taiwan and Vietnam, but industry groups warn that June and July may show a payback as orders dry up.
Regional Sentiment Divergence Widens
Asia: Sentiment in Asia improved modestly. Chinese stimulus whispers, a rebound in South Korean exports, and strong retail activity in India supported a more optimistic regional tone. However, capital flows remain cautious, partly due to the uncertain U.S. dollar trajectory.
The eurozone economy remains robust, driven by firm industrial orders in Germany and rising consumer sentiment in southern Europe. With inflation falling faster than expected, ECB rate cuts are now widely anticipated by Q3, underpinning asset market optimism.
The U.S. economy appears to be in a holding pattern. Fiscal policy remains unclear, with debate over the proposed “One Big Beautiful Bill” to extend tax cuts and expand spending. The Federal Reserve is hesitant, adopting a “wait and see” approach amid mixed signals. The dollar weakened, unsettling markets that had positioned for tighter policy and greater fiscal discipline.
Japan’s economy contracted in the first quarter of 2025, with preliminary data indicating a 0.7% annualized decline in real GDP. This downturn was primarily attributed to weakened exports and subdued domestic consumption. Inflation remained elevated, Tokyo, where the core CPI rose by 3.6% year-on-year in May, surpassing expectations. The sustained inflation has kept the Bank of Japan (BOJ) under pressure to consider policy adjustments, however the BoJ appears sensitive to the impact of increasing rates on future growth.
In response to the economic challenges, the Japanese government pledged to implement “nimble” fiscal actions as needed. This includes the possibility of supplementary budgets aimed at mitigating the impact of rising living costs and supporting economic recovery.
Emerging Markets – renewed confidence
The key feature of recent months has been the renewed economic confidence in the emerging markets and in particular in China. Despite the challenges of US tariffs domestic policies rolled out to renew confidence appear to be working. Economic data has trended stronger than expected (Chart 2)
Chart 2: Emerging Market Surprise Indices Positive
Source: Bloomberg
Asset Markets
Chart 3: Asset Market Returns over Three Years
Source: Bloomberg
Equities
The month began with heightened market anxiety due to the U.S. administration’s aggressive tariff policies, including a proposed 50% tariff on European Union imports. However, a subsequent 90-day pause on most tariffs, excluding those on China, provided temporary relief, leading to a significant market rally. The S&P 500 recorded its best monthly performance since November 2023, rising 6.2%, while the Nasdaq surged 9.6%. Other major equity markets return to a more modest however European equities are now up over 20% year to-date significantly outperforming the US.
Asia ex- Japan equity markets performed well helped by an investor anticipation that the central banks could be cutting interest rates in coming months.
Emerging market returns were relatively quiet after some relatively good performance in previous months. The momentum still appears to be with the emerging markets. In May alone, India witnessed $5.5bn in block trades – the highest monthly total in nearly a year – signalling renewed domestic confidence in the market.
Table 1: Equity Market returns in May 2025
Source: Bloomberg
Equity sector performance
By sector, the IT sector and Banks led the way. The relief in the markets on the seeming rolling back of tariffs particularly helped the IT sector which has a large exposure to China. Companies such as NVIDIA produced results that beat expectations, and highlighted sustained demand for AI-related products.
Banks also performed well helped by the better sentiment in the financial markets and the steepening US Treasury yield curve which helps bank profitability. Banks such as JPMorgan Chase (+26%) and Wells Fargo (18.5%) have provided high year to-date returns in a near zero return US equity market.
Table 2: Global equity sector total returns in May 2025
Source: Bloomberg
Bond markets
U.S. Treasury yields climbed notably during May, reflecting investor apprehension about the nation’s fiscal trajectory. The 10-year Treasury yield reached approximately 4.41% by the end of the month, while the 30-year yield approached 4.92% . These increases were influenced by factors such as the proposed “One Big Beautiful Bill,” which aims to extend 2017 tax cuts and expand infrastructure spending, potentially adding $3.3 trillion to the national debt over the next decade.
Internationally, bond markets exhibited varied responses. In Japan, long-term government bond yields surged amid concerns over inflation and reduced support from the Bank of Japan, leading to fears of a potential unwinding of the yen carry trade. Conversely, European bonds, particularly German Bunds, attracted investors seeking stability, benefiting from the relative strength of the euro and a more conservative fiscal stance
Chart 4: US and JGB 30-year Bond Yields on a Tear
Source: Bloomberg
Table 3: Bond Market Total Returns for May 2025
Source: Bloomberg
In the credit sector, high-yield bonds demonstrated resilience, with the average return for US high-yield idex returning 1.7%, spreads again narrowed.
The JPMorgan Emerging Markets Bond Index (EMBI) Hard currency index experienced a modest return of 0.7% in May. The EMBI spread for the dollar debt of EM sovereigns narrowed by 30bps through the month reflecting the increased appetite of global investors for EM debt.
Local Currency EM Debt: Local currency bonds also demonstrated resilience. The Vaneck EM Local bond ETF posted a gain of 1.5% for the month, contributing to a year-to-date return of 8.4%. This performance was bolstered by favourable currency movements and declining inflation rates in several emerging economies.
Chart 5: US High Yield Spread Slips Back Lower (%)
Source: Bloomberg
FX and Precious metals
The feature of the month was the sharp rally in the Yen. Ongoing geopolitical issues, particularly in the Middle East, have led to a further rise in gold and bitcoin. Increased expectations of lower US rates reinforced the rise in the gold price and, as we saw in July, a weaker dollar.
Table 4: Performance of Precious Metals and Currencies for May 2025
Source: Bloomberg
Chart 6: Bitcoin Slips Pass Gold on 12 month Performance ($ rebased to -1yr =100)
