MARKET COMMENTARY – MAY 2025

Global markets faced heightened volatility in April, the highest level since the pandemic, as US President Trump’s “Liberation Day” tariff announcements were more extreme than anticipated (a 10% tariff rate on all US imports and higher reciprocal tariffs for countries with which the US has large trade deficits). Equity markets initially fell sharply, but partially recovered as new tariffs were later suspended for 90 days for most countries while negotiations take place and tariffs on a range of electronic products were removed. Escalating US-China trade tensions also eased somewhat as a result of the US softening its approach. Uncertainty impacted global bond markets, however returns from global government bonds were positive overall, supported mainly by euro government bonds and to a lesser extent UK gilts, along with a weaker US dollar.

Gold, as a traditional safe-haven asset, reached a new record high, while commodities gave up some of their year to date gains as metal prices softened and oil declined in response to rising recession fears and an increase in global oil supply.

US equities underperformed most other regions in April with the decline adding to weakness from February’s peak. Energy and healthcare were the weakest performing sectors over the period. Markets were further unsettled by uncertainty surrounding the continued independence of the Federal Reserve Bank (Fed), though President Trump reassured that he has no intention of removing Fed Chair Jay Powell. Signs of economic moderation and a decline of consumer sentiment led to concerns around the increased risk of recession. US inflation rates for March declined and the Fed held interest rates steady but delivered mixed messaging around the potential for cuts later in the year. With the likelihood of inflation reaccelerating over the next few months, markets have reassessed expectations but continue to price in several US interest rate cuts by the end of the year.

European equities were slightly positive in April, showing greater resilience compared to the US, with defensive areas of the market including consumer staples and utilities outperforming. While rising trade tensions and the unresolved conflict in Ukraine weigh on sentiment, negotiations with the US and political agreement in Germany to form a new coalition government provided some relief to eurozone stocks. The European Central Bank cut interest rates by 0.25% on 17 April, with the growth outlook having deteriorated as a result of the US tariffs.

The UK FTSE All Share Index fell slightly with the energy sector again being the main laggard while the defensive utilities sector was the top performer. The domestically focussed FTSE 250 Index outperformed the more internationally focused large cap FTSE 100 Index during the month, with weakness in the US dollar being a detractor for internationally exposed UK companies with overseas earnings. With an encouraging decline in March inflation, coupled with slowing growth and concerns arising from tariffs, the Bank of England cut interest rates from 4.5% to 4.25% on 8 May. Further interest rate cuts are expected in the coming months, though there remains uncertainty about the extent and magnitude.

Emerging markets were relatively resilient, achieving a small positive return for the month, outperforming developed markets, and aided by a weaker US dollar. Particularly strong returns came from countries such as Mexico and Brazil where the tariff approach was less severe. India continued to perform well, supported by easier monetary conditions, improving inflation and a weaker US dollar. South African equities gained, helped by record high gold prices. Chinese equities underperformed, with their retaliatory response to US tariffs escalating over the course of the month however the easing of tensions from tariff negotiations and solid GDP growth helped to drive a rebound in Chinese stocks.

Bond markets also saw significant volatility, with yields fluctuating in response to shifting market dynamics/concerns over fiscal sustainability, trade policy uncertainty, the potential inflationary effects of proposed tariffs and future monetary policy easing alongside equity market volatility. US Treasury yields moved higher early in the month, with the 10-year yield reaching 4.6% before easing slightly to 4.2% by month end, as investors adjusted their expectations for interest rate cuts in 2025.  European interest rate cuts and the prospect of lower interest rates ahead provided support for European government bond markets. UK government bonds (gilts) yields were volatile but stabilised towards the end of the month, producing moderate gains overall.

With much uncertainty around the direction of US trade policy and its potential implications, market volatility is expected to persist in the near term. Exposure to a diversified range of asset classes, regions and sectors should help reduce risks. In the current environment, high quality government bonds and alternative assets are likely to continue offering value, providing both recession protection and inflation hedging.

Total returns in GBP to 30/04/2025

*March 2025

Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk

This commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.