Uncertainty over US trade tariffs dominated markets in the quarter. However, equities made gains as the initially announced tariffs were later suspended and recessions fears receded. In fixed income markets, the focus began to turn from interest rate cuts to worries over debt sustainability.
Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions, and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
Global equities
Global shares gained in Q2 despite some sharp falls at the start of the quarter when President Trump unveiled new “Liberation Day” trade tariffs. Equity markets subsequently recovered amid the temporary suspension of most tariffs while trade talks took place, with a deadline of 9 July for most countries.
US
US shares advanced in Q2. Gains were led by the information technology and communication services sectors as investor appetite for some of the “Magnificent 7” stocks reignited, while stocks with exposure to artificial intelligence staged a strong recovery after some weakness earlier in the year.
US shares were also supported by corporate earnings for Q1, which were generally robust. Underperforming sectors in the quarter included healthcare and energy. The Trump administration is seeking to lower drug prices in the US, pressuring the share prices of some healthcare companies.
US economic data generally remained resilient although Q1 GDP fell by 0.5% (according to the third estimate from the Bureau of Economic Analysis). This was due to higher imports in the quarter, which likely occurred as a result of concerns around future tariffs. Employment data largely remained resilient.
President Trump unveiled flagship tax and spending legislation which was passed by the House of Representatives in June. The bill extends tax cuts passed in 2017, increases defence spending, and cuts spending on programmes such as Medicaid.
Eurozone
Eurozone shares also made strong gains. The industrials and real estate sectors led the advance. Within industrials, defence stocks generally continued their good performance amid an agreement at the NATO summit for countries to lift defence spending. Consumer discretionary, healthcare and energy underperformed.
The European Central Bank (ECB) cut interest rates twice in the period, by 25 basis points each time. ECB President Christine Lagarde said that the central bank had “nearly concluded” its rate-cutting cycle. Eurozone annual inflation was 1.9% in May, down from 2.2% in April (according to Eurostat data).
UK
In the UK, the FTSE All-Share moved higher. Top performing sectors included industrials, telecommunications, utilities and real estate. Laggards were energy and healthcare. The mid cap FTSE 250 index outperformed the large cap FTSE 100 index, partly due to the latter’s higher exposure to these underperforming sectors.
The Bank of England (BoE) cut interest rates by 25bps to 4.25% in May. Inflation remains above the BoE’s 2% target, with a reading of 3.4% for May (according to the Office for National Statistics).
Japan
The Japanese equity market posted strong gains, with the TOPIX Total Return up 7.5% and the Nikkei 225 rising 13.6%, driven by outperformance of growth stocks. Market sentiment initially declined following the Trump administration’s announcement of “reciprocal” tariffs but steadily improved amid positive developments in trade negotiations with China and other key partners, easing recession fears.
Many Japanese companies released full-year results and provided guidance for fiscal 2025. Although earnings forecasts were cautious, shareholder returns through dividend increases and buybacks rose significantly, reflecting ongoing corporate governance reforms and efforts to enhance return on equity- key factors supporting the market’s performance during the period.
Emerging markets
Emerging market (EM) equities were just ahead of their developed market peers in Q2, helped by weakness in the US dollar. Both the EM and World indices delivered double-digit returns in US dollar terms. While equity markets were rattled by President Trump’s sweeping Liberation Day tariffs announced in early April, the subsequent 90-day pause allayed fears somewhat and helped shares recover. Equity markets continued to perform well during May and June, with positive progress on trade talks between the US and China providing a supportive backdrop for broader EM.
Korea posted strongly positive double-digit returns (in US dollar terms) over the quarter as political instability subsided following the election of a new president – Democratic Party candidate Lee Jae-myung – in early June.
Strong gains were also made by Taiwan which continued to benefit from investor optimism about artificial intelligence. Brazil’s outperformance came as the central bank hiked interest rates twice in the quarter, lending support to the real, which rallied against the US dollar.
India underperformed with growth concerns and expensive valuations continuing to weigh on the market. China posted a small positive return over the quarter while Saudi Arabia was the only EM index market to decline in US dollar terms over the quarter as geopolitical tensions in the Middle East took their toll.
Asia ex-Japan
The MSCI Asia ex-Japan index made strong gains in Q2 as trade fears eased and sentiment towards technology stocks and artificial intelligence improved. Top performing markets included Korea, Taiwan and Hong Kong. In Taiwan, the quarter was also marked by a sharp jump in the Taiwanese dollar, which was partly as a result of exporters selling some US dollar assets.
China and Thailand underperformed the index. The early part of the period was marked by escalating tariff threats between the US and China, although a more conciliatory approach was eventually taken, helping to support Chinese shares. However, weak domestic economic data continued to weigh on sentiment.
Global bonds
Q2 was characterised by a rise in geopolitical tensions – both due to US tariffs and developments in the Middle East. Recession fears peaked around the Liberation Day tariff announcements in the US but later faded as a more conciliatory approach was taken to tariffs. There was a shift in emphasis away from monetary policy, as central banks neared the end of their rate cutting cycles, and towards fiscal policy and what this would mean for debt sustainability.
US developments dominated markets this quarter. Liberation Day saw President Trump unveil larger and more broad-based tariffs than expected (a 10% tariff rate on all US imports and higher reciprocal tariffs for countries with which US has large trade deficit). A 90-day suspension was later invoked to allow for a period of negotiation (due to expire on 9 July) and this more conciliatory approach – particularly with China – assuaged recession fears.
The market quickly shifted focus to concerns around US debt sustainability. The Reconciliation Bill (“Big Beautiful Bill”) was judged to worsen US debt dynamics. Moody’s credit rating agency highlighted the increased burden of financing the US government’s budget deficit and cut the sovereign rating to Aa1.
This episode marked the peak of US Treasury yields for the quarter, with other high deficit countries vulnerable to the sell-off. A combination of worsening fiscal conditions, and a structural supply and demand imbalance prompted the 30-year Japanese government bond yield to peak at an all-time-high of 3.2% (yields move inversely to prices).
Major central banks were either on hold – such as the US Federal Reserve, the Bank of Japan, or easing monetary conditions modestly. The BoE retained its quarterly pattern of rate cuts, lowering the base rate to 4.25% while the ECB cut its main policy rate twice leaving it at 2%.
Over the quarter, yield curves across all major government bond markets steepened (i.e. yields moved comparatively higher in longer dated bonds). Japanese and Canadian government bond markets were the laggards, with the Bank of Canada expressing uncertainty around US tariff policy. Weak growth and easing inflation pressures prompted a comparatively positive market reaction in the Australian rates market.
Credit markets performed with remarkable resilience amid global uncertainties, supported by a robust technical backdrop of high all-in-yields and relatively low net issuance. Returns were positive across sectors and geographies. (All-in-yield refers to the total yield earned on a fixed income security if it is held to maturity. This yield takes into account not only the bond’s coupon payments but also any capital gains or losses if the bond is purchased at a price different from its face value.)
After widening sharply in the wake of Liberation Day, US corporate investment grade (IG) spreads retraced back to below levels pre-Liberation Day, marking an outperformance of government bonds overall. Euro and sterling IG followed a similar pattern as sentiment improved. Credit spreads are the difference in yield between a corporate bond and government bond, reflecting the additional risk investors take on when lending to corporations.)
This backdrop was particularly supportive of high yield credit and although performing with greater volatility, both US and euro high yield outperformed their investment grade counterparts over the quarter overall. Investment grade bonds are the highest quality bonds as determined by a credit rating agency. High yield bonds are more speculative, with a credit rating below investment grade.
Among currencies, the US dollar index weakened to its lowest level in three years in June. Uncertainties around trade policy and moderating domestic growth versus growth supportive fiscal policy elsewhere weighed on the currency.
Commodities
In commodities, the S&P GSCI Index declined in the quarter. The energy component was weak. Escalating conflict risk in the Middle East caused a brief oil price surge amid worries about disruption to shipping, but oversupply of oil kept prices contained. Opec+ announced another increase in oil production for July, following two other recent increases. (Opec+ is a grouping of oil-exporting countries, including the 12 Opec members and ten other oil exporters).
The agriculture component was also weak, although cocoa surged higher. Livestock, industrial metals and precious metals advanced. Elevated levels of risk, such as trade tariffs and geopolitical concerns, continue to see investors favour the safe haven of precious metals.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
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