Weekly Overview 19. – 25. 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: Lower expected growth, weaker business activity and a 50% tariff threat by the US president drove European stocks lower this week. The European Union as a bloc is the largest trading partner of the US (ahead of Mexico, Canada and China). With such a massive tariff hit, this would significantly raise the cost of items such as pharma products, autos, repair products and parts, and others. In retaliation, the EU has been preparing a package of measures, some of which include hitting US products and, more importantly, US services exported to the EU, a segment of the balance of payments where the US runs a surplus with the EU. This news came in the same week in which the EU and the UK reached a deal on trade and defense, providing relief for transactions between Britain and the continent and participation in the common European defense fund. The food agreement will allow for fewer border checks and synchronization of food standards. Flash PMIs showed that business activity remains in contraction territory in the UK, Germany, France and the Eurozone as a whole in May. The services sector stayed above the 50 threshold in the euro area, but it was in contraction in the UK, Germany and France. While there are tentative signs of recovery in manufacturing in Germany and France, overall economic picture remains fragile and there is still a need for more convincing momentum before returning to growth. The European Commission cut its growth projections for 2025 due to the impact of the US tariff policies, while inflation is still seen as hitting the 2% target in 2025, earlier than had been forecast. Quarterly growth in Germany was revised up to 0.4% QoQ for Q1, but the economy is expected to stay flat as a whole this year. In a setback to the Bank of England, inflation in the UK has re-accelerated, reaching 3.5% YoY in April. Retail sales were up more than expected in April as consumer confidence increased.

– UNITED STATES: Once again, US stocks reversed course and fell week-on-week, mainly as a result of the bond market jitters and the threat by US President Donald Trump of a 50% tariff on EU imports in response to “the trade negotiations going nowhere”. Yields on 20- and 30-year Treasury bonds were trading above 5.1% after the Moody’s downgrade and the related fears about the US fiscal risks, especially in light of the new House budget that is expected to increase the deficit and debt further. The fears in the bond and stock markets were also sparked by the relatively weaker-than-expected Treasury auction that pushed yields higher. The problem is growing because half of publicly traded Treasury bonds ($14tn) are about to mature soon and will have to be refinanced at higher rates, making it even more costly for the federal government. This additional interest cost may force the Federal Reserve at some point to step in with extraordinary measures again in order to loosen financial conditions, which can reignite inflation. This is what experts would call an “emerging market trap”, despite the fact that the USA is not one. Business activity recovered in May, according to the PMI surveys of S&P Global, with readings in expansion territory for both manufacturing and services. Forward-looking responses indicate sentiment has deteriorated due to trade-related concerns and that prices have risen at the fastest rate since August 2022, overwhelmingly due to the effects of the tariffs. Export orders have fallen and supply chain delays have become worse. The housing market is in trouble: existing home sales are at levels similar to those seen during the financial crisis, while pent-up demand keeps rising. 30-year mortgage rates continued to climb.

– ASIA-PACIFIC: While major Japanese stock indices fell this week, investors’ attention continues to turn toward the situation in the bond market as 10y yields rose to 1.55%, while 30y yields neared 3.2%. Not only is inflation still rising, but the bond market now appears to need support, as the BoJ has ended its purchase program. As reported in the Financial Times, the government could urge quasi-governmental entities to support JGBs, which may involve selling US Treasuries. Long-maturity debt is hit most severely by the rout as it has been most dependent on purchases by large institutions – and buyers seem to be shunning auctions these days. Net bond supply is now reportedly at the highest levels since 2010 and the BoJ might soon be forced to take actions to provide relief, such as excluding very-long-term JGBs from the tapering. In China, the main stock indices declined a bit, with weakening retail sales in April and a lower-than-expected growth in fixed investments due to a significant drop in property investments. Nevertheless, there was an unexpected outperformance in industrial output, signaling that China may be able to avoid a more material slowdown in its economy. Lending rates were cut by 10bps after a cut by the PBoC, with the loan prime rate reaching 3% (1y) and 3.5% (5y) in an effort to stimulate domestic demand.

– BITCOIN: BTC reached a new all-time high of $112,509.65 in USD this week, becoming one of the world’s top 5 most valuable assets. The crypto market also took a hit from the latest tariff announcement by Trump and BTC is currently hovering around $107.5k, below the high reached this week. As Coinbase joined the S&P 500, crypto bulls are hailing this as a crowning achievement of acceptance and recognition of the legitimacy of Bitcoin. They see this as a sign that crypto infrastructure has matured into a “credible, systemic part of the financial ecosystem”. This means crypto holdings will now become more of a default exposure, even in conservative portfolios, and it is yet to be seen whether this is a good thing.

policy rate overview AND INVESTMENT ENVIRONMENT

A recent research article, published by the CFA Institute, provides some useful insights about financial market returns during various tariff regimes over the past 150 years. The data show that the performance of equities was mostly in line with long-term averages over the entire period, with real returns averaging 5.3% during the Protectionist Peak and 5.1% during the Smoot-Hawley era. Bonds underperformed, with real returns averaging 2.7% and 1.1% respectively, while gold posted negative returns during the 1875–1913 period. However, if we look at factor stock portfolios, their returns were consistently higher than the overall equity market, adding approximately 2pp in both high-tariff regimes. During the 1875–1913 period, low volatility had an impressive outperformance, while during the 1930–1945 Smoot-Hawley period, it was the size factor that delivered the most superior results. The authors of the study conclude that equity factors consistently add value over the market portfolio in both high and low openness scenarios, with low-volatility strategies in particular delivering strong performance. Factors have been resilient across various tariff regimes. The question now is whether these historical patterns can hold in the current regime, which is not just a high-tariff one but also one that seems to shift investor attention to a “sell America” focus? Disturbing and/or dismantling the established global economic, financial and trade order has the potential to be a more more disruptive to investment flows in a much larger and much more globalized economy today, where the US does not have a unilateral advantage or control over the supply chains.