Jul 3, 2025
Q2 2025 was marked by exceptional roller coaster of geopolitical and macro news flow.From tariffs to war in the Middle East and central banks cutting interest rates. The data shows that it was a quarter of marked good returns from most asset classes but it was also a quarter of exceptional worry and angst amongst governments the world over.
Timeline of Some of the Key Events – Q2 2025
April 2:
• President Trump announces “Liberation Day” tariffs – 10% universal baseline, with reciprocal tariffs of up to 50%.
April 5:
• Base-level tariffs take effect. Markets sell off globally.
April 9:
• Reciprocal tariffs on 57 countries activated.
Mid-April:
• Markets begin pricing in supply chain disruptions. Auto and tech sectors under pressure.
May 12:
• Partial trade détente with China—tariff rollback announced, rare earth exports resume.
June 6:
• ECB cuts interest rates by 25bps, citing disinflation progress.
June 13:
• Israel launches a surprise attack on dozens of Iranian nuclear and military targets
June 22:
• US attacks three Iranian nuclear facilities.
June 24th
• Iran Israel Ceasefire agreed
June 26:
• FOMC holds rates; dot plot signals only one cut in 2025. Dollar weakens on policy ambiguity.
June 28:
• White House signals flexibility on tariffs ahead of Q3 talks; markets are cautiously optimistic.
Geopolitical volatility provided the backdrop to a global economy that showed remarkable resilience, with inflation remaining relatively well-behaved. The U.S. administration’s flip-flopping on tariffs—now summed up by the TACO mantra (“Trump Always Chickens Out”)—helped moderate market concerns, as the initial headline tariff rate of nearly 30% gradually faded. By quarter-end, the market’s best guess was that the effective tariff rate would land closer to 13%, still roughly five times higher than it was in March.
The global economy entered a more divergent phase in Q2. U.S. growth slowed significantly from its strong Q1 pace, as consumption softened under the combined weight of higher interest costs and trade-related disruptions. Europe, by contrast, surprised to the upside, with improving PMIs and retail figures. China’s recovery remained fragile but stabilized somewhat in May, supported by better-than-expected retail sales and industrial production.
Inflation trends were broadly encouraging. Headline CPI rates in both the U.S. and Europe continued to decline, though U.S. core services inflation remained persistently sticky. Several central banks responded with rate cuts. The ECB led with a 25bp reduction in June—its first of the cycle—followed by the Bank of Canada and a number of emerging market central banks. The U.S. Federal Reserve held rates steady for a fourth consecutive meeting but signaled in its June dot plot that only one rate cut was likely in 2025. Market pricing remained more dovish, anticipating two cuts and highlighting a gap between Fed guidance and rate futures.
While the data has so far shown stronger-than-expected growth and moderating inflation, sentiment going into Q3 is more cautious. Many expect growth to slow further and for tariffs to eventually feed through into pipeline inflation. Some economists now forecast U.S. inflation to annualize around 5% in the coming months, with GDP growth slipping below 1%.
Chart 1: Global Economic Surprise Indices – Inflation and Growth
CESI Index
Source: Bloomberg
India, China, and Japan
India remained a standout in Q2 2025, driven by resilient domestic demand, steady capex, and stable inflation. Growth forecasts held firm, supported by strong performance in services, infrastructure, and exports—particularly to the Middle East and Africa. The RBI noted that economic momentum remained solid despite global headwinds.
China’s growth softened slightly as external demand weakened and manufacturing activity stayed sluggish. The official PMI hovered just below 50, indicating mild contraction, though there were signs of stabilization by quarter-end. Exports were front-loaded ahead of U.S. tariff changes, helping Q2 GDP, but deflation risks and property sector weakness remained key challenges.
Japan saw modest growth, though the picture was mixed. Industrial output underperformed, and pre-tariff export surges distorted the data. The Bank of Japan revised its growth outlook lower, citing soft trade and global uncertainty. Inflation stayed low but not weak enough to prompt policy easing.
Broader Asia Trends
Southeast Asia posted steady growth of 4–5% across major economies. Consumer demand held firm in Indonesia and the Philippines, while Malaysia and Vietnam benefited from supply chain shifts. Export-heavy markets like South Korea and Taiwan were more cautious due to U.S.–China trade frictions, though tech sector activity spiked due to front-loaded orders. Inflation remained contained, allowing for supportive monetary policy across much of the region.
Asset Markets
Equities
Global equities surged in Q2, delivering double-digit returns across major indices. The MSCI World ACWI recorded 11.1% total return over the quarter ending May 30th. Emerging markets also performed strongly, with the MSCI Emerging Markets index rising 12.5% for the quarter in USD. Europe remained in favour with global investors and returns were enhanced by the weakness of the dollar against the euro.
Chart 2: European Equities Continue to Climb in Absolute and Relative Terms
Source: Bloomberg
Similarly, Japan had some good performance (+11.4%). Investor concerns around trade tensions continued to linger, but improved investor sentiment driven by corporate governance reforms and shareholder-friendly policies helped sustain the recovery. By late June, renewed trade optimism and signs of a more hawkish path reversal in global policy saw the index break past the 40,000 level—marking its strongest quarterly performance in years.
Emerging market returns were marginally stronger than the developed markets. They were supported by a weaker U.S. dollar, improved growth prospects, and easing trade tensions . A broad-based shift of global capital out of U.S. assets favored emerging-market stocks, with investors drawn to higher real yields, stronger corporate earnings momentum
Table 1: Equity Market total returns as at June 30th
Source: Bloomberg, *MSCI
Equity sector performance
The IT sector was back on the front foot with a near 18% return for the quarter. Palantir, Broadcom and Oracle were the pick of the big names with returns for the quarter of 50-60%. Microsoft marginally outpaced Nvidia with a 40% return. The risk on nature of the quarter was exemplified by the weak performance of consumer staples.
The healthcare sector underperformed in Q2 2025 as several healthcare companies delivered weak Q1 results and cautious forward guidance in April and May. Large-cap biotech firms such as Gilead and Moderna flagged softer-than-expected demand, a slowdown in new product launches, and ongoing declines in COVID-related revenue streams. At the same time, major health insurers like UnitedHealth and Humana reported rising costs in their Medicare Advantage programs, as medical utilization increased beyond actuarial assumptions. This raised concerns about margin compression across managed care.
The energy sector ended the quarter down but in a very wide trading range given the challenges in the Middle East.
Table 2: Global equity sector total returns as at Jun 2025
Source: Bloomberg
Bond Markets
Volatility Driven by Tariffs and Liquidity Stress
U.S. Treasuries initially rallied following the sweeping “Liberation Day” tariffs announced on April 2, which triggered a sharp risk-off move. The 10-year yield fell to 3.86% by April 4—its lowest since October 2024—as markets anticipated slower growth and more dovish central bank action.
Sharp Reversal on Inflation and Forced Liquidations
The rally reversed abruptly. By April 9, the 10-year yield had spiked to 4.50% and the 30-year to 4.92%, marking the steepest three-day yield jump since 1982. The sell-off was driven by forced liquidations among hedge funds using highly leveraged Treasury basis trades, which collapsed under rising margin pressures. Liquidity vanished quickly, amplifying volatility, while concerns over rising inflation and U.S. fiscal sustainability deepened the rout.
Stabilization by Quarter-End
Despite the turmoil, bond markets stabilized, with the 10-year Treasury ending the quarter around 4.25%—near Q1 levels. Softer inflation data in May and June helped revive expectations for a possible Fed rate cut by July. Paradoxically, U.S. bonds held up in price terms even amid modest outflows from bond mutual funds and ETFs, underscoring the market’s resilience despite structural fragilities.
Chart 3: US 10-year bond yield in the middle of range back to mid-2023
Source: Bloomberg
Europe: Yields Ease on Softer Data and Policy Reassurance
In Europe, bond markets were more stable. Yields across the eurozone declined by around 20 basis points over the quarter, with the German 10-year Bund finishing at approximately 2.60%. A combination of benign inflation, signs of economic stagnation in parts of the euro area (notably Germany and Italy), and the European Central Bank’s decision to cut rates in June for the first time since 2019 provided a constructive backdrop. Peripheral spreads, such as those on Italian and Greek bonds, remained well-contained—suggesting market confidence that the ECB will maintain policy support even in the face of fiscal slippage in some member states.
Asia: Diverging Trends Between Japan, China, and India
In the second quarter of 2025, Asian bond markets exhibited a wide divergence in trends, shaped by region-specific economic conditions and central bank actions.
In China, the government bond market remained anchored by subdued economic momentum and continued policy support. The 10-year Chinese government bond yield ended the quarter around 1.65%, only marginally lower than at the start of the period. Weak export growth, lacklustre domestic investment, and persistent disinflation kept upward pressure off yields. The People’s Bank of China maintained a cautious easing bias throughout the quarter, using targeted liquidity injections to support sectors under stress without triggering significant capital flight or yuan depreciation. The muted yield environment reflects the market’s continued pricing of structurally weaker growth expectations and limited inflation risk.
Japan’s bond market experienced more volatility. The 10-year JGB yield reached as high as 1.45% in mid-May before easing to around 1.39% by the end of June. Long-dated bonds—especially 30- and 40-year maturities—saw sharp sell-offs in May, with yields climbing to over 3.1% and 3.6% respectively as investor demand weakened during government auctions. This prompted concern within the Bank of Japan, which responded by slowing the pace of its bond purchase tapering for fiscal year 2026. While the BoJ left policy rates unchanged at its June meeting, it made clear it would proceed cautiously in removing stimulus, citing elevated global uncertainty and domestic financial market fragility.
In contrast, India’s bond market remained comparatively stable and better supported. The 10-year government bond yield fell to around 6.2% by late May, down from roughly 6.5% earlier in the quarter. This decline was driven by improved inflation dynamics and continued liquidity support from the Reserve Bank of India. The central bank refrained from any further tightening moves, focusing instead on ensuring ample funding conditions. Despite a wave of fresh bond issuance to support fiscal spending, yields remained contained thanks to strong domestic investor demand. However, foreign portfolio investors were net sellers during the quarter, withdrawing over $2 billion from local bond markets—reflecting global caution on emerging market risk assets amid U.S. fiscal and inflation concerns.
Source: Bloomberg
Emerging Market Bonds
Emerging market bonds delivered solid performance in Q2 2025, supported by stable macro conditions, easing inflation, and renewed investor interest. Both local and hard currency segments posted gains, driven by attractive yields, currency strength, and improving sentiment toward EMs versus developed markets.
Local currency government bonds outperformed. The JPMorgan GBI-EM Global Diversified Index rose about 2.5% for the quarter, with April particularly strong—delivering over 3% as several EM currencies appreciated against a weaker U.S. dollar. Softer inflation and positive real rates across many EMs, including Brazil, Indonesia, and South Africa, helped attract inflows. By June-end, year-to-date returns for local bonds were estimated between 7–10%.
Hard currency debt also performed well. The JPMorgan EMBI Global Diversified Index returned around 2.2% in Q2. April saw wider sovereign spreads after the U.S. tariff announcements, but markets stabilized in May and June. Despite some headline risks in countries like Turkey and Argentina, the broader EM credit universe benefited from improving fundamentals, lower external financing needs, and easing central bank stances.
Meanwhile, U.S. high yield corporate bonds continued to perform, with spreads tightening further amid limited supply and steady investor demand.
Chart 4: US High Yield spreads narrow again (%)
Source: Bloomberg
FX and Precious metals
The US dollar came under sustained downward pressure. The U.S. Dollar Index (DXY), which measures the dollar’s value against a basket of major currencies, declined by approximately 7% during Q2. This marked its worst start to a year since 1995 with support stillhard to come by.
Gold prices surged to record highs in April, peaking at $3,500 per ounce amid escalating trade tensions and economic uncertainties. The Q2 return at 5.7% suggested some loss of momentum after some strong performance around the turn of the year. The metal benefited from heightened geopolitical tensions, particularly around U.S. tariff policy and renewed instability in the Middle East. Central bank buying, especially from emerging markets, remained strong, while retail investment demand softened slightly due to a rebound in risk assets. The U.S. dollar’s weakness and renewed speculation about future Fed rate cuts also supported prices.
Chart 5: Gold price just keeps going
Source: Bloomberg
Bitcoin experienced a powerful rebound, surging approximately 30–31 % in Q2—its strongest quarterly gain since 2020. This recovery fully erased the 11.8 % drop from Q1 and brought prices up from early-quarter lows near $82K to a peak just under its all‑time high of ~$112K set mid‑May . Institutional demand via spot Bitcoin ETFs was a significant driver, alongside expectations for Fed rate cuts, weakening USD, and renewed macro optimism.
Despite the strong quarterly gains, Bitcoin ended Q2 trading around $107K–$108K, slightly below resistance near $112K–$114K as profit‑taking and order absorption slowed momentum Retail interest remains comparatively muted, with market moves now led more by large holders and institutional flows.
Chart 6: Bitcoin to New Highs
Source: Bloomberg
