Weekly Overview 12. – 18. May 2025

The content of this post does not constitute financial advice. It is intended for information and education purposes only.

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The Week in Global Markets

FINANCIAL MARKETS SUMMARY:

– EUROPE: Most benchmark European stock indices advanced this week with rising optimism that the trade tensions will continue to recede. In Germany, the ZEW indicator has risen, indicating that economic expectations are improving. With the new government, the progress made in the tariff disputes and a stabilising inflation rate, optimism has grown and sentiment is now better in almost all industries according to the May survey. Looking forward to more anticipated rate cuts, the outlook has turned positive for construction, the banking sector, and some of the biggest industries. Domestic demand is expected to rise in the following quarters. In the euro area, industrial production was up materially in March, with strong jumps in capital goods and durable consumer goods output. The trade surplus is also up significantly MoM and YoY due to an export jump to the US. In Britain, real GDP grew more than expected in Q1 driven by a rise in investments, exports and services output. Meanwhile, unemployment was slightly up in Q1, and the number of employed persons declined (Feb-Apr). 10y yields on German and UK government bonds crept up during the week, while both the pound and the euro depreciated against the US dollar.

– UNITED STATES: This was a strong week for US stocks, with tech, industrials and consumer discretionary leading the way. On the positive news regarding the negotiations’ outcomes between the US and China, investment flows showed strong signs of reversal, with the Nasdaq advance being particularly impressive. However, all S&P 500 sectors were up week-on-week, although this did not yet reflect the post-market-close US government debt downgrade by Moody’s (see more below). Tariffs between the US and China will be temporarily reduced for the next 90 days to 30% on the US side and 10% on the China side while trade negotiations proceed. Inflation data releases (both CPI and PPI) showed that the effect of these tariffs are not yet reflected in consumer or producer prices, as the figures declined further in April. Nevertheless, Walmart announced that prices in its stores will be rising this month, and likely even more in June, as a result of the tariffs. The company’s CEO stated that, with the considerable magnitude of the tariffs, they will not be able to absorb all the pressure, given how narrow retail margins are. US President Trump did react to this warning, saying that the company should “eat the tariffs” instead of passing the duties onto consumers, stating that he will be “watching, and so will customers”. Trump has similarly told domestic automakers not to raise their prices, even though outside analyses say his tariffs would raise production costs. He also expressed dissatisfaction with the attempts by Apple to shift production of iPhones toward India. Retail sales did not grow in April as much as they did in March, as consumers showed signs of reduced spending for motor vehicles and auto parts, sporting goods, apparel, etc. The University of Michigan’s consumer sentiment survey showed another month of deterioration, with year-ahead inflation expectations jumping further to 7.3%. US Treasury yields remained elevated across most maturities this week.

– ASIA-PACIFIC: Major Japanese indices – the Nikkei 225 and the TOPIX – were up slightly week-on-week, while Japan is still insisting on reassessment of all tariffs imposed by the US. The yen has weakened further against the US dollar despite expectations that the US could press for further weakening of the dollar in order to provide trade relief. JGB 10y yields rose by nearly 10bp as the economy shrank by more than expected in Q1 QoQ as a result of weak private consumption. This could influence the direction and timing of the BoJ’s next interest rate decision, although it is still expected to be a hike. In China, the news about what was agreed last weekend in the US talks caused investor optimism to bounce back and major stock indices rallied, though not as strongly as in the US. However, the deal so far appears to be more favorable for China, given that the import duty relief for Chinese consumers is larger and the conditions so far have gone in line with Beijing’s key demands, as opposed to using Trump’s proposed 80% tariff rate. It is not yet clear how large the stimulus package will be in light of this outcome. In India, benchmark stock indices recovered as the ceasefire situation remained in place officially. India’s defense stocks may be poised for more gains going forward, as a steady increase in orders and growing export opportunities have the potential to push revenues and profits further up.

– BITCOIN: Bitcoin fluctuated between $101-105k this week, currently around $103.9k at the time of writing. Trading activity suggests that there is some consolidation is ongoing, given the recent rally, which may lead to a short-term decline back to the $90k mark, but in the long run, analysts and bulls see more upside potential. This would be the case especially if more positive news about international trade and negotiation outcomes comes out. In the past few weeks, some US and international companies have indicated that they plan to acquire more Bitcoin and build BTC-based treasuries, which could drive up prices further.

policy rate overview AND INVESTMENT ENVIRONMENT

The last of the 3 largest credit rating agencies – Moody’s – has taken away the US’s top Aaa rating. The agency downgraded the US government on Monday to Aa1 (with a stable outlook) as a result of rising deficit and debt concerns. Its statement highlights that successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. This downgrade comes right as Republicans in Congress are trying to implement a significant tax-and-spending bill that would extend expiring tax cuts, add some new tax cuts, reduce spending on Medicaid and nutrition assistance, and boost border enforcement and national defense. The bill is estimated to increase budget deficits by about $3tn over the next decade, compared with a scenario where the tax cuts would have expired on December 31st as planned. There are investors who see this downgrade as further damaging the US’s international position in the wake of the harm done by the trade war. Long-term bond yields did go up a bit, while major stock indices gave back some of their gains from the week after the market closed in reaction to the change in the rating. An important concern is that some institutional holders of Treasuries are prohibited (or limited) from holding debt that is not triple-A rated by at least one of the main rating agencies – these may be forced by requirements and regulations to sell their holdings. To avoid this, regulators might actually change the rules, something that the Trump administration has already indicated they plan to do (for instance, a deregulation of the banking sector, involving relaxing or removing some or most of the requirements introduced in the aftermath of the 2008 Global Financial Crisis).