Oct 6, 2025
August Tariffs – Another Brick in the Wall
The defining feature of the quarter was the 1 August tariff reset. A 10% universal baseline tariff was imposed on most imports, with higher rates for Japan, Korea, Canada, Mexico, and the EU. China was granted a temporary truce at 10% until November while longer-term terms are negotiated. Each new announcement jolted sentiment – not decisive on its own, but another brick in the wall of protectionism weighing on global flows. At the same time, the White House pressed the Fed for action. The central bank obliged with a 25bp cut in September, taking the funds rate to 4.00–4.25%. The unusual mix of protectionist fiscal policy and easier money reshaped global capital flows and left markets volatile.
Pressure on the Fed
At the same time, the White House kept up its pressure on the Federal Reserve. After months of noisy interventions, the Fed obliged with a 25bp rate cut in September, bringing the funds rate down to 4.00–4.25%. Even here, the sense was that politics rather than data had accelerated the decision. This unusual mix — fiscal protectionism plus monetary loosening — is reshaping global flows, and it explains why markets have been prone to sudden swings in both equity volatility and FX.
Chart 1: Global Economic Surprise Indices – Inflation and Growth
Index
Source: Bloomberg
US growth surprises but employment worries
Growth surprised on the upside: Q2 GDP was revised up to 3.8% annualised, the fastest since 2023, and early Q3 estimates suggest momentum has carried through close to 4%. Consumption remained firm, but the labour market softened. Unemployment rose to 4.3% and payroll growth slowed to barely 20,000 in August. Inflation remains awkward rather than alarming, with headline CPI at 2.9% y/y and core CPI at 3.1%. The Fed’s preferred PCE stood at 2.7% y/y (core 2.9%). Tariffs are expected to add 0.3–0.5pp to inflation into 2026. The Fed’s first cut in September opened an easing cycle, but policymakers are boxed in: cut too fast and risk inflation; cut too slowly and risk a weaker labour market. The US remains the global growth driver, but with more fragility beneath the surface.
Chart 2: US Labour Market Weakens
Net new jobs (Private Sector)
Source: Bloomberg
Inflation data has been awkward rather than alarming. Headline CPI registered 2.9% y/y in August, with core CPI running at 3.1%. The Fed’s preferred PCE deflator came in at 2.7% y/y, with core at 2.9%. Month-on-month prints of 0.3% for headline and 0.2% for core suggest a slow grind lower, not the clean disinflation markets had hoped for. Tariffs will make this more complicated: estimates from the CBO and academic models imply that the new duties could add between 0.3–0.5 percentage points to inflation in 2025–26.
The Fed’s September rate cut marked the opening of an easing cycle, but policymakers are boxed in. Too fast, and they risk reigniting inflation. Too slow, and the labour market may weaken further. The Fed “dot plot” implies further rate cuts are possible this year, but conditional on labour slackening and tariffs not pushing inflation higher. In short: the US remains the global growth engine, but one facing the awkward combination of strong output, weakening jobs, and sticky prices.
Euro Area bumbling along
Europe achieved faster disinflation than expected. Headline HICP slipped to 2.2% y/y in August, finally near target. That allowed the ECB to bring the deposit rate to 2.0% and describe policy as “in a good place.” Growth, however, remains flat. Germany continues to struggle with external demand, while France and Italy are sluggish domestically. Inflation progress was the positive surprise; the absence of any growth response to easier policy the disappointment. Europe looks stable but stagnant.
Financial conditions have loosened somewhat as yields fell, but the private-sector credit impulse remains weak. The hope for a mini-recovery in the second half has not yet materialised. What surprised was the speed of inflation’s retreat, faster than many forecasters expected. What disappointed was the absence of any growth response to easier policy. Europe, in short, looks stable but unsurprising.
Chart 3: European consumers have rarelly been net positive!
Eurozone consumer confidence indicator
Source: Bloomberg
United Kingdom inflation worries
The UK remains the G7 inflation outlier. Headline CPI eased to 2.2% y/y, but services inflation stayed elevated at 5.5%. The Bank of England paused after earlier cuts, keeping Bank Rate at 4.75%. Growth has been tepid, weighed down by higher mortgage costs and fiscal drag. The surprise was the speed of headline disinflation; the disappointment was the stickiness of services prices. Policy will remain cautious until that gap narrows.
Japan – wage growth
Japan is edging toward normalisation. Headline CPI in August stood at 2.9% y/y, with the core-core measure at 2.5%, both above target. Wage gains earlier in the year have fed into services prices, prompting the BoJ to hold its policy rate near 0.5% and begin unwinding ETF holdings. Growth has been weaker than hoped, with softer Chinese demand and a weak yen eroding real incomes. The surprise was persistent above-target inflation; the disappointment, the lack of robust domestic demand. Investors now expect further small tightening, though not a full hiking cycle.
Chart 4: Japanese wage growth accelerates
Year-on-year nominal cash wage growth (%)
Source: Bloomberg
China – gentle policy support
China’s recovery remains two-speed. Industrial output rose 5.8% y/y in August, but retail sales gained only 3.1%. Fixed-asset investment slowed to 3.4% YTD, weighed down by property weakness. CPI was just 0.6% y/y and PPI negative, pointing to subdued pricing power. The PBoC trimmed the MLF to 2.40% and the loan prime rate to 3.35%, but avoided aggressive easing to prevent yuan depreciation. Fiscal support included a ¥500bn credit line for policy banks and targeted housing measures. Industrial resilience was the surprise; consumer caution the disappointment.
India – good growth and disinflation
India remains the growth leader. GDP rose 6.7% y/y in Q2, supported by government capex and resilient consumption. Industrial output climbed about 4% y/y in August. Inflation cooled to 4.2%, well within the RBI’s tolerance band. The central bank has held the repo rate at 6.25%, cautious on food and energy costs post-monsoon. The surprise was the quick drop in inflation; the disappointment, weak exports in electronics and chemicals. India’s story remains one of strong domestic drivers offset by external softness.
Chart 5: Indian core inflation still well behaved and likely trending lower
Source: Bloomberg
ASEAN – Growth and well behaved inflation
ASEAN economies showed resilience. Singapore’s core inflation fell to 2.6% y/y in August, allowing policy to remain steady. Indonesia cut rates to 4.75% as inflation eased, even as it intervened to support the rupiah. Vietnam’s growth stayed robust, around 6.5%, though electronics exports slowed. The surprise was the confidence to cut rates; the disappointment, continued export softness in trade-heavy economies.
Australasia – disinflation underway
Australia is in firm disinflation. CPI slowed to 3.0% y/y in August, prompting the RBA to cut to 3.60%. The labour market softened, with unemployment at 4.2% and vacancies falling. In New Zealand, the RBNZ cut to 3.0% and flagged more easing as growth undershot. The surprise was the decisiveness of New Zealand’s policy; the disappointment, weak hiring and investment appetite in Australia.
Middle East – Oil price weakness a headwind
Oil dominated the region’s narrative. Brent fell back into the high $60s, surprising those who expected geopolitics to hold it above $80. OPEC+ modestly increased supply, and Kurdistan exports resumed. Fiscal balances across the GCC remain healthy, with Saudi Arabia’s Vision 2030 projects and the UAE’s services-led growth in focus. The surprise was oil’s weakness; the disappointment, patchy non-oil performance in some economies.
Table 1: Consensus Economic Forecasts
Source: Bloomberg
Asset Markets Review
Equities
Global equities posted a strong third quarter, with broad indices delivering returns of around 7% in US dollar terms. Gains were led by US and Japanese markets, where technology, exporters, and corporate reform stories drew in capital, while Europe and parts of Asia offered steadier but positive contributions. The rally was fuelled by resilient earnings, a shift toward easier monetary policy in several regions, and investor confidence that disinflation and soft-landing dynamics remained intact. Despite political noise and new tariffs, equity markets closed the quarter on a broadly optimistic footing.
Chart 6: Global equities have rebounded sharply from April lows
MSCI World Index (USD TR)
Source: Bloomberg
Since the end of June 2025, the US equity market has been characterised by record-setting momentum punctuated by bouts of volatility. The S&P 500 pushed into new highs through July and August as investors pushed into megacap technology, where earnings once again exceeded expectations. Share buyback activity remained strong, further underpinning the index. The Nasdaq benefited from enthusiasm around AI infrastructure and cloud demand, with capital expenditure guidance from the largest players signalling that the investment cycle still has legs. Financials and energy added breadth to the rally in July, but cyclicals such as autos and industrials wobbled once the new tariff regime began to cloud the export outlook.
Market leadership stayed narrow, though the summer brought tentative rotation into value and high-dividend stocks as bond yields eased with the Fed’s first rate cut in September. Small-caps lagged meaningfully, reflecting higher funding costs and limited pricing power. Volatility spikes tended to coincide with tariff announcements or inflation data, but were short-lived as investors returned to the dominant themes of tech-led growth, cash returns, and the expectation that monetary policy will gradually loosen. The result has been a market that continues to climb, but one that relies heavily on a few sectors and the assumption that the policy and earnings backdrop will remain supportive.
Chart 7: Tech still leads the US market higher as small cap lags
S&P500, Nasdaq 100 and Russell 2000
Source: Bloomberg
European equities had a reasonably strong quarter, though their gains were more measured than in some other regions and certainly a step down from the strong performance earlier in the year. The STOXX Europe 600 and related indices enjoyed support from domestic-oriented sectors — banks, industrials, and defence names led the charge — even as export-exposed and high-growth sectors lagged under tariff anxieties and weak external demand. Currency helped returns: the euro’s relative strength vs the dollar boosted local gains for foreign investors. Valuations remained attractive relative to the US, with dividend yields and income orientation inviting interest. That said, volatility intruded occasionally (particularly around trade announcements), and earnings revisions were modestly cautious. In sum: European equities outperformed modestly, sustained by income, value, and selective leadership, but without a broad breakout.
Chart 8: European equities loses half of its relative gains to US equities
Relative performance rebased to 2025=100
Source: Bloomberg
Over the quarter, Japanese equities delivered a solid showing, buoyed by corporate reforms, dividend increases, and a weakening yen, although near-term volatility and external headwinds tempered gains. The Nikkei 225 climbed from the high 39,000s into the low 44,000s range, reaching fresh record highs by mid-August before pulling back slightly on profit taking. The rally was broadly supported by exporters benefiting from a softer yen, improved earnings outlooks, and increased share buyback activity, as investors positioned for what they hope will be a “rebirth” in Japanese equity appetite by foreign investors. That said, concerns over tariff spillovers, BOJ policy tightening, held the market back from even better returns.
Chart 9: Japanese Share Buy Backs (Yen 10 billion)
Source: Quick
In Japan, the quarter saw a notable pickup in corporate activity that reflected the country’s shifting governance culture. EQT a major international private equity firm moved to acquire Fujitec in a $2.7 billion deal, highlighting foreign appetite for undervalued assets. Toyota’s decision to fold Toyota Industries into its structure raised speculation that other industrial groups might also unwind long-standing cross-shareholdings. At the same time, Mitsubishi broadened its global footprint with a large aquaculture investment, underlining how trading houses are diversifying beyond the domestic market. Together, these developments underscored the pressure on Japanese companies to unlock value and respond more decisively to shareholder demands.
Emerging market returns
Emerging market equities delivered a positive third quarter, but with striking divergence between countries. The standout was China, where indices gained in double digits since end-June, fuelled by policy support, easing financial conditions, and optimism around technology exports. In contrast, India underperformed, weighed down by foreign outflows, a weakening rupee, and stretched valuations meeting softer earnings in rate-sensitive sectors. Indonesia emerged as a regional winner, with equities hitting record highs on the back of resilient domestic demand, easing inflation, and renewed enthusiasm for its role as a critical supplier of nickel and other green-transition commodities. Elsewhere in Latin America, Brazil traded sideways as monetary tightness offset commodity strength, while Mexico remained under pressure from tariff risks. Overall, the EM story in Q3 was one of dispersion: investors rewarded reform momentum and credible policy anchors, but punished high valuations and external vulnerabilities.
Chart 10: Greater China asset markets have contributed to both developed market and emerging market equity performance
Source: Bloomberg
In stark contrast, Indian equities experienced a underperformed with a valuation-driven correction. After a prolonged bull run that left market valuations at historically stretched levels, investor sentiment soured due to a delayed monsoon season threatening agricultural output and weaker than expected corporate earnings.
The Indonesian equity market emerged as a standout performer, significantly outperforming its broader emerging market peers. The rally in Jakarta Composite Index was primarily fuelled by a powerful confluence of commodity tailwinds and transformative domestic policy. A sustained surge in global prices for nickel, palm oil, and copper—key Indonesian exports—dramatically improved the country’s trade balance and corporate profitability, particularly for resource-linked stocks. Furthermore, President-elect Prabowo Subianto’s decisive electoral victory provided a clear mandate for policy continuity, specifically his flagship program of free school lunches and meals. This initiative bolstered investor confidence by promising to stimulate growth.
Table 2: Equity Market returns at end of September 2025
Source: Bloomberg
Equity sector performance
Global equities advanced in the third quarter of 2025, though the distribution of returns across sectors showed distinct leadership patterns. Technology once again set the pace: the sector delivered a 12.3% total return over the quarter, building on powerful themes of AI investment, cloud infrastructure, and continued capex momentum from the “mega-cap seven.” Energy also fared well, with a 6.2% quarterly gain, supported by firm crude prices early in the period and disciplined OPEC+ supply management, even if September itself saw a small pullback. Banks staged another remarkable run, returning 11.4%, as resilient credit conditions, higher-for-longer real rates, and robust earnings momentum kept financials at the top of the global league table.
In contrast, defensives struggled. Consumer Staples fell 3.9% over the quarter, giving back earlier gains as investors rotated toward growth and cyclicality. Healthcare eked out a 3.0% return, but the sector remains in negative territory on a 12-month basis, weighed down by pricing concerns and uneven earnings delivery. Consumer Discretionary rose 8.3%, reflecting strong auto and luxury sales alongside steady household spending, though performance was more uneven beneath the headline. Taken together, Q3 confirmed the dominance of growth and cyclicals — IT, Banks, and Consumer Discretionary — while traditional defensives lost ground, leaving the sectoral backdrop skewed toward risk appetite rather than caution.
Table 3: Global equity sector total returns as of Sept 30th 2025
Source: Bloomberg
Bond Markets
The US Treasury market in Q3 2025 delivered a robust and positive return, marking a decisive reversal from the volatility of the first half of the year. The rally was primarily driven by a confluence of better than worse expectations inflation data and mounting evidence of a possible economic slowdown. A rate cut from the Fed and rising expectations of further rate cuts by year end helped. This led to lower yields across the curve but also a significant steepening of the yield curve, Short-term yields fell in anticipation of imminent rate cuts. Longer-dated yields also drop as investors priced in a sustained period of lower growth and inflation. However a drop in long term bond yields was moderated by fears of high government borrowing.
The Investor hunt for yield had divergent effects across other fixed-income sectors. US investment-grade (IG) corporate bonds performed strongly, benefitting from tighter credit spreads as a healthy corporate balance sheet narrative persisted. In contrast, the high-yield (HY) market faced headwinds, with its performance bifurcated. While higher-quality junk bonds managed modest gains, lower-rated issuers struggled as the softening economic outlook heightened default fears. Meanwhile, emerging market (EM) dollar-denominated debt delivered solid returns. However, EM local currency debt was a mixed bag, with performance heavily dependent on individual countries’ economic prospects and monetary policies, though it generally benefited from a more stable dollar environment during the quarter.
Chart 11: US 10-year bond yield at low end of recent range
Source: Bloomberg
Table 4: Bond market performance as of September 30th 2025
Source: Bloomberg
Europe: Yields Ease on Softer Data and Policy Reassurance
The European bond market rallied powerfully in Q3 2025, driven by a sharp pivot in ECB policy expectations as recession fears overwhelmed lingering inflation concerns. This sent core yields, led by German Bunds, significantly lower. The yield curve underwent a pronounced bull steepening, with short-dated yields falling fastest on bets of imminent rate cuts.
This trend created a clear divergence in credit. Investment-grade corporates outperformed, benefitting from both falling yields and spread compression. In contrast, high-yield bonds saw muted gains as widening default risk premiums partially offset the rally, underscoring a quarter defined by a flight to quality.
Emerging Market Bonds
Emerging market (EM) dollar-denominated debt delivered solid returns. However, EM local currency debt was a mixed bag, with performance heavily dependent on individual countries’ economic prospects and monetary policies, though it generally benefited from a more stable dollar environment during the quarter.
Chart 12: US High Yield spreads narrow again (%)
Source: Bloomberg
Currency markets in the third quarter reflected diverging monetary and macro dynamics. The US dollar stabilised, with the dollar spot index gaining 0.9% over the three months, helped by resilient US growth and only tentative Fed easing. Even so, on a year-to-date basis the dollar remained down nearly 10%, reflecting the broader reassessment of “higher for longer” that had dominated late 2024.
The euro was steady, with its trade-weighted index up a marginal 0.1% for the quarter, maintaining its position as one of the stronger major currencies this year thanks to contained inflation and policy credibility. The pound slipped, losing 1.7% on a trade-weighted basis, as sticky services inflation kept the Bank of England cautious but economic momentum faltered, leaving sterling softer against peers. The yen gained 2.7% against the dollar over Q3, supported by expectations of further normalisation from the Bank of Japan and investor appetite for a currency long considered undervalued. Overall, Q3 currency moves confirmed a world in transition: the dollar was no longer the unchallenged leader, the euro consolidated modest gains, sterling lagged, and the yen clawed back some ground from deeply depressed levels.
Source: Bloomberg
Precious metals delivered a compelling and dynamic performance in Q3 2025, with the sector’s narrative shifting decisively from inflation-hedge to safe-haven as the quarter progressed. Gold was the clear leader, breaking decisively above the $2,500 per ounce barrier in September after a sluggish start and now seemingy on its way to $4,000. This rally was not driven by traditional inflation concerns, but by a late-quarter flight to safety as softening global growth data and rising geopolitical instability. Silver, while following gold’s trajectory, exhibited its characteristic volatility; its dual role as a precious metal and industrial commodity saw it struggle initially with the weaker economic outlook, before a powerful catch-up rally late in the quarter cemented strong gains.
Chart 13: Gold price just keeps going and going…
Source: Bloomberg
Cryptocurrencies delivered strong gains in the third quarter, with Ethereum outperforming Bitcoin. Ethereum rose by more than 20% since the end of June, buoyed by growing use in tokenisation projects, institutional adoption, and optimism around future network upgrades. Bitcoin advanced too, though at a more modest pace, briefly testing new highs before profit-taking trimmed returns. Altcoins saw mixed fortunes, with AI-linked and DeFi tokens attracting flows while many speculative smaller coins lagged. Overall, Q3 was a positive quarter for the asset class, but leadership clearly shifted toward Ethereum, which drew the bulk of investor enthusiasm.
Chart 14: Ethereum’s Strong Q3 brings it close to Bitcoin YTD
rebased to -1Y =100
Source: Bloomberg
