MARKET COMMMENTARY – JULY 2025

Global markets saw varying degrees of positive returns throughout June, with volatility remaining elevated as investors grappled with tariff policy uncertainty and war in the Middle East. In both cases, investors’ worst fears ultimately proved unfounded, and with no significant deterioration in hard data, most major asset classes delivered positive returns over the quarter. A ceasefire in the Middle East, NATO’s renewed commitment to defence spending, and a G7 agreement on global taxation all helped ease geopolitical tensions. Meanwhile, signs of a more measured U.S. stance on tariffs have emerged. Although the current effective tariff rate remains elevated, at its highest level since the 1930s, structural constraints appear to be tempering policy shifts. Persistent realities, such as the complexity of global supply chains and the importance of foreign capital to U.S. debt markets, have prompted carveouts for certain sectors and a restart of U.S.-China trade dialogue.

U.S. stocks and bonds continued to rise, however the U.S. dollar declined over the 2^nd quarter, impairing the value of gains for pound-based investors. U.S. equities reached new all-time highs, driven in part by progress in U.S.-China trade negotiations. The S&P 500 advanced more than 5.7% in June and climbed nearly 24% from April’s lows, with technology stocks leading the charge. In fixed income, U.S. 10-year Treasury yields edged down, though they remained about 40 basis points above their April trough. Meanwhile, inflationary pressures showed signs of persistence, with core inflation rising in May, as tariff-related costs pass-through to goods prices.

UK equity markets underperformed broader global indices, reflecting sector-specific challenges during an otherwise strong quarter for equities. The FTSE All-Share returning just 0.48% in June, held back by the index’s high exposure to the energy and healthcare sectors, both of which were among the few global equity sectors to post negative returns over the period. Despite these headwinds, the UK market still delivered healthy gains over the second quarter, supported by resilience in defensive names and the global risk-on environment. In fixed income, UK government bonds lagged their European counterparts, as inflation remains elevated and the Bank of England’s policy for further interest rate cuts remain limited. While no major policy shift occurred during the month, markets remain attuned to the evolving inflation outlook and its implications for future rate decisions, although markets still anticipate two more interest rate cuts by the end of the year.

European markets posted solid gains over the month, though they lagged the strength seen in U.S. equities. European stocks in local currency terms moderately rose, but dollar weakness significantly amplified returns for U.S.-based investors, lifting euro-denominated equities to gain in dollar terms. This currency movement contributed to strong investor flows into the region, as global investors sought diversification away from the U.S. market. On the fixed income side, European government bonds outperformed their U.S. and Japanese counterparts, supported by a more accommodative policy stance from the European Central Bank (ECB). Softer inflation data allowed the ECB to deliver rate cuts in both April and June, reducing the deposit rate to 2.0%. While the ECB signalled a more cautious stance going forward, the bank’s own projections suggest inflation may remain below target into next year, prompting market expectations for at least one more cut by year-end. Bond yields in the region declined by 17 basis points over the quarter, and tightening spreads led to particularly strong performance from Italian government bonds.

Emerging markets saw broad-based gains in June, supported by improving investor sentiment, a weaker U.S. dollar, and easing trade tensions. Both equity and fixed income markets benefited as capital rotated away from developed markets in search of higher yields and growth potential. Improved inflation dynamics in several key regions and greater policy stability also helped underpin performance. With global risk appetite recovering, emerging markets were well positioned to attract renewed interest, particularly in regions showing fiscal discipline and macroeconomic resilience.

Commodities markets experienced notable volatility over the quarter, driven by shifting geopolitical risks, evolving trade dynamics, and uncertainty around global growth. Safe-haven demand supported precious metals, while energy markets responded to changing supply expectations and regional tensions. Industrial metals were more subdued, reflecting weaker manufacturing data and ongoing uncertainty around tariffs and global trade flows. Agricultural commodities also faced headwinds from unpredictable weather patterns and tightening financial conditions in key exporting regions. While parts of the market saw renewed strength toward the end of June as sentiment stabilised, commodity prices remain sensitive to geopolitical developments and broader macroeconomic trends.

Markets are still reacting to signals from central banks and global leaders. With inflation starting to ease, interest rate cuts being gradually implemented throughout the start of the year in the Eurozone, and the U.S. may follow. While recession worries have lessened, issues like trade policy, government debt, and global tensions continue to shape the outlook. Trade conditions seem unlikely to return to be as accommodating as they have been in previous decades and along with other uncertainties, staying diversified across different asset types, regions, and sectors remains the most effective means of managing risk.

Total returns in GBP to 30/06/2025

*May 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.