Summary

The Trump administration signalled a shift toward diplomacy, engaging in multiple bilateral trade negotiations and securing a temporary but significant reduction in tariffs with China. This move helped restore investor confidence, with equity markets rebounding from April losses. US markets are increasingly pricing in the prospect of ongoing dialogue and a reduced economic impact from trade tensions.

Despite these developments, the US maintained a broadly protectionist stance, notably raising tariffs on steel and aluminium. However, a recent unfavourable court ruling has raised legal questions around President Trump’s ‘Liberation Day’ reciprocal tariffs.

On the monetary policy front, the US Federal Reserve opted to hold interest rates steady, citing elevated uncertainty. In contrast, the Reserve Bank of Australia (RBA) took a more proactive stance, cutting the official cash rate to 3.85% in an effort to support domestic growth.

Selected market returns (%), May 2025

 Sources: *FTSE EPRA/NAREIT DEVELOPED, **FTSE Global Core Infrastructure 50/50 Index

Key market and economic developments in May 2025

Financial markets

Global equity markets quickly recovered losses from April, with the MSCI World (USD) rising a sizable 6.0% during the month, led by the US market, with the S&P 500 rising 6.3%. The US market total return is now positive for the 2025 calendar year, although it is yet to reach its previous high on February 19.

Australian equities

The ASX 200 posted a strong gain of 4.2% in May, pushing calendar year returns into positive territory and bringing the index just shy of its all-time high set in February 2025. The Financials sector remained the primary driver of performance, returning 5.1% for the month, led by index heavyweight Commonwealth Bank of Australia (CBA), which rose 5.6%. Over the past 12 months, CBA has delivered an impressive 52% return, making it by far the largest contributor to Australian equity market gains.

Information Technology was the standout performer in percentage terms, surging 19.8% as global growth and tech stocks rallied sharply. Energy also delivered solid gains, rising 8.6% despite relatively flat oil prices. Meanwhile, the Resources sector continued to underperform on a relative basis, managing a modest 1.8% increase for the month.

Global equities

There was widespread strength in global equity markets, as a relief rally was broadly felt across developed and emerging markets. The US market was driven higher by large cap technology, with a 9.2% rise in the Nasdaq 100 (USD) index. The broader S&P 500 (USD) was up 6.3%, while the Russell 2000 (USD) small cap index was up 5.8%. Markets across key trading partners were also very strong, with the Euro Stoxx 50 (EUR) index, Japanese Nikkei 225 (JPY) and the Hang Seng (HKD) rising 6.0%, 5.3% and 6.6% respectively.

The US earnings season through May was again relatively robust, with 78% of companies exceeding Earnings per Share (EPS) estimates, in line with the 5-year average[1]. Companies reported annual earnings growth of 12.9%, which supported the market. There were concerns that companies would downgrade or withdraw their guidance for profits in upcoming quarters, which typically hurts investor confidence. However, from S&P 500 only 8 companies withdrew guidance and 37 downgraded, with 64 increasing and 139 maintaining guidance.

Commodities

Commodity markets delivered mixed performance in May. Gold posted a modest decline of -0.7%, reflecting a moderation in tariff-related concerns and a more tempered risk environment.

Crude oil prices continued to weaken amid a shift in OPEC+ dynamics. Led by Saudi Arabia, key producers ramped up output in an effort to reclaim market share and exert pressure on member nations exceeding production quotas. With global markets already well-supplied and demand outlooks uncertain, Brent Crude fell to $61 per barrel, weighed down by oversupply concerns and broader economic uncertainty.

Bond markets

US bond markets saw yields increasing through May, leading to lower prices, especially for longer dated bonds. The US House of Representatives narrowly passed the ‘One Big Beautiful Bill’ budget, which is estimated to add $2.4 trillion to the US deficit over a decade,[2] leading to further concerns around fiscal sustainability. This was compounded by a poor outcome from an auction of new 20-Year US Treasury Bonds and a sovereign credit downgrade from Moody’s, leading to pressure on bond prices. Long dated 20 and 30-year bonds finished the month just under the psychological 5% level, while the 10-year rose from 4.16% to 4.39%.

Domestically, Australian bonds also drifted higher but to a lesser extent, reflecting a better fiscal situation in Australia and market expectations of further rate cuts from the RBA.

Economic developments

RBA cuts interest rates

As anticipated, the RBA reduced the cash rate from 4.1% to 3.85% in May. The decision was largely driven by a more favourable inflation outlook, as we noted in April. The RBA highlighted that year-on-year trimmed mean inflation (to the end of March) eased to 2.9%, with headline CPI at 2.4%, and both measures are expected to remain broadly stable in the near term.

The RBA described domestic economic conditions as mixed. The labour market remains resilient, with the unemployment rate holding steady at 4.1%. However, consumer spending and sentiment have softened more than expected. While the RBA reiterated its data-dependent approach to future policy moves, market participants are now pricing in two to three additional rate cuts over the course of 2025.

US Court of International Trade throws tariff into doubt

In a surprise ruling in late May, the US Court of International Trade unanimously ruled that the Trump administration’s sweeping ‘Liberation Day’ tariffs, introduced under the 1977 International Emergency Economic Powers Act (IEEPA), were unlawful. President Trump had cited the US trade deficit as an “ongoing emergency” to justify the tariffs, but in a detailed 50-page judgment, the court found that the IEEPA does not grant the President the authority to impose tariffs in this manner. The ruling casts serious doubt over the legal foundation of the policy. The administration has since appealed, with expectations that the case could eventually reach the Supreme Court.

This legal setback exposes a vulnerability in President Trump’s trade strategy, particularly given the lack of precedent and the unanimous nature of the ruling. It also raises questions about the administration’s ability to impose tariffs unilaterally, as seen earlier in the year. The uncertainty may prompt trade partners to adopt a more cautious, wait-and-see approach to negotiations, potentially delaying progress on new agreements.

While the ruling specifically targets the IEEPA-based tariffs, other trade restrictions, such as those on steel, aluminium, and autos, remain in place under Section 232 of the Trade Expansion Act, which allows for tariffs on national security grounds. These measures, although also facing legal challenges, may serve as alternative tools for the administration to advance its protectionist agenda.

Outlook

Uncertainty with respect to US government policy, the economy and the market remains elevated. However, a closer look at economic and market fundamentals reveals several areas of resilience that should not be overlooked. While zero-sum trade tensions act as a drag on global growth, they may be partially offset by several constructive developments, such as continued advances in AI driving productivity, fiscal reform and rate cuts in Europe, and ongoing stimulus and structural reform efforts in China.

Although the range of potential outcomes is broad, our base case remains that the global economy and markets will likely experience bouts of volatility but continue to move forward. In this environment, we see strong value in diversification as a key risk management tool. We see significant benefit to investors in diversification to manage risk and believe that remaining active and alert to risks and opportunities is crucial.

Major market indicators

	31-May-25	30-Apr-25	31-Mar-25	Qtr change	1 year change
Interest Rates (at close of period)
Aus 90 day Bank Bills	3.73%	4.02%	4.12%	-44.0	-63.0
Aus 10yr Bond	4.28%	4.13%	4.42%	-14.2	-4.4
US 90 day T Bill	4.25%	4.20%	4.21%	+5.0	-100.0
US 10 yr Bond	4.39%	4.16%	4.21%	+19.0	-10.0
Currency (against the AUD)
US Dollar	0.644	0.640	0.623	3.49%	-3.23%
British Pound	0.478	0.479	0.485	-3.30%	-8.49%
Euro	0.567	0.564	0.580	-5.22%	-7.56%
Japanese Yen	92.70	91.63	93.56	-0.75%	-11.40%
Trade-Weighted Index	59.60	59.90	59.60	0.17%	-5.55%
Equity Markets
Australian All Ordinaries	4.2%	3.6%	-3.5%	4.1%	12.4%
MSCI Australia Value (AUD)	3.0%	2.9%	-2.5%	3.3%	10.9%
MSCI Australia Growth (AUD)	4.9%	5.3%	-5.4%	4.5%	19.7%
S&P 500 (USD)	6.3%	-0.7%	-5.6%	-0.4%	13.5%
MSCI US Value (USD)	2.7%	-3.5%	-2.4%	-3.4%	8.4%
MSCI US Growth (USD)	10.0%	2.5%	-9.0%	2.6%	19.5%
MSCI World (USD)	6.0%	0.9%	-4.4%	2.3%	14.2%
Nikkei (YEN)	5.3%	1.2%	-3.3%	3.0%	0.6%
CSI 300 (CNY)	2.0%	-2.9%	-0.1%	-1.0%	10.8%
FTSE 100 (GBP)	3.8%	-0.7%	-2.0%	1.0%	10.1%
DAX (EUR)	6.7%	1.5%	-1.7%	6.4%	29.7%
Euro 100 (EUR)	5.8%	-1.9%	-1.9%	1.8%	6.7%
MSCI Emerging Markets (USD)	4.3%	1.3%	0.7%	6.4%	13.6%
Commodities
Iron Ore (USD)	-1.6%	-5.4%	-1.5%	-8.3%	-19.3%
Crude Oil WTI U$/BBL	3.5%	-17.1%	2.7%	-11.9%	-20.9%
Gold Bullion $/t oz	-0.7%	5.9%	9.6%	15.2%	41.0%

Sources: Quilla, Refinitiv Datastream

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[1] According to Factset

[2] According to Yale Budget Lab

Summary

The Trump administration announced reciprocal tariffs in early April, in what was labelled ‘Liberation Day’. The scale of tariffs was much higher than expected, triggering a plunge in global equity markets and a spike in volatility to the highest levels in five years. Concerns of a potential US recession and resurgent inflation fuelled these reactions. Equity markets subsequently stabilised and recovered most post-announcement losses as the administration delayed numerous tariffs and granted exemptions, coinciding with many countries proactively entering trade negotiations. Domestically, a moderate quarterly inflation report boosted expectations for a post-election interest rate cut.

Selected market returns (%), April 2025

 Sources: *FTSE EPRA/NAREIT DEVELOPED, **FTSE Global Core Infrastructure 50/50 Index

Key market and economic developments in April 2025

Financial markets

Global equity markets experienced significant volatility, impacted by heightened tariff-related concerns. Despite intra-month declines exceeding 10%, the MSCI World Index (USD) recovered to finish the month with a positive gain of 0.9%, supported by a weaker US dollar and indications of a potential de-escalation in US trade tensions towards the back end of the month.

Australian equities

The S&P/ASX All Ordinaries advanced 3.6% in April, recouping its March loss.  Similarly, the S&P/ASX MidCap 50 Index rose by 3.4%, while the Small Ordinaries Index recorded a more modest increase of 1.8%. Communications Services and Information Technology were the strongest performing sectors, increasing by 6.5% and 6.4% respectively. The Materials sector posted a 0.7% increase despite general softness in commodity prices, while the Energy sector declined by 7.7% amidst a sharp fall in oil prices.

Global equities

In the US, equity markets largely recovered substantial intra-month drawdowns. The S&P 500 (USD) ended April slightly lower, closing down 0.7%. The technology-focused Nasdaq 100 (USD) advanced 1.5% for the month, staging a sizable rally from its early April low. The Russell 2000 (USD), representing US small-caps, declined by 2.4%, as potential economic headwinds for domestically focused businesses weighed on sentiment. Sector performances were varied, influenced by the commencement of the US earnings season, which offered some support amidst evolving expectations for slowing earnings growth. Information Technology was the leading sector, gaining 1.6%.  The weakest performers were Energy, which fell 13.7%, and Healthcare, which declined 3.7%.

European equity markets were broadly weaker, with the Euro 100 (EUR) decreasing by 1.9%. The German DAX (EUR), however, continued its trend of relative strength, advancing 1.5%. The CSI 300 (CNY) fell 2.9% as Chinese equities were negatively affected by the US tariff news. Nevertheless, the broader MSCI Emerging Markets (USD) registered a gain of 1.3%, bolstered by a strong rally in Indian equities as the Nifty 50 (INR) rose by 3.5%, supported by perceived progress in trade negotiations with the US.

Commodities

A weaker US dollar in April did not translate into broad support for commodity prices. Gold, however, continued its upward trend driven by safe-haven demand, rising 5.9% to close the month at $3308 per ounce. Global economic growth concerns weighed on the demand outlook for crude oil, leading to a substantial decline of 17.1% to $58.15 per barrel. Similarly, base metals saw price weakness, with copper prices dropping 8.3% and iron ore falling 5.4%.

Bond markets

April saw considerable volatility in bond markets. The benchmark US 10-year Treasury yield experienced a large intra-month trading range of 60 basis points but ultimately closed the month 5 basis points lower at 4.16%. This volatility reflected investors’ efforts to reconcile the potential inflationary impacts of US tariffs, which could push yields higher, against a weakening economic growth outlook that would typically pressure yields downwards. The elevated level of bond market volatility ultimately proved crucial to the US administration softening its tariff implementation in the week that followed ‘liberation day’.

Domestically, the benchmark Australian 10-year bond yield declined by 29 basis points, ending the month at 4.13%. The Australian bond market focused more on the evolving domestic inflation outlook and its potential implications for the future path of interest rates, rather than being swayed by global uncertainties.

Economic developments

Inflation data raises the likelihood of an RBA rate cut

Australia’s core trimmed mean Consumer Price Index (CPI), the Reserve Bank of Australia’s (RBA) preferred underlying inflation measure, registered 2.9% year-on-year, moderating from 3.2%. This aligned with the RBA’s February forecast and marked a return to the 2-3% target band for the first time since late 2021. Headline CPI held steady at 2.4%, showing further moderation in some stickier components like new dwelling prices, while insurance premiums saw their slowest rise since 2022. These outcomes strengthen the case for a 25 basis point rate cut in May.

The Australian labour market remained resilient, with the unemployment rate remaining close to full employment at ~4%. Positively, employment grew by 32,200, with measures of underemployment and youth unemployment improving marginally. However, job advertisements fell for the second consecutive month, indicating future potential softening.

The Westpac-Melbourne Institute Consumer Sentiment Index fell 6% in April, driven by weaker finance and employment outlooks. Notably, consumers surveyed after President Trump’s tariff announcement reported a 10% drop in confidence compared to a 2.1% fall among those surveyed prior.

Tariffs weigh on the global economic outlook

Tariff-induced uncertainty negatively impacted US economic data. Preliminary Q1 US Gross Domestic Product (GDP) contracted at an annualised rate of -0.3%, missing the 0.2% forecast, primarily due to a sharp fall in net exports and slower consumption reflecting decreased confidence. Business investment did rise, partly boosted by tariff-related inventory building.

The Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditures (PCE) Price Index, slowed to 2.3% year-on-year from 2.7%, slightly above the 2.2% expectation. While a positive outcome for the interest rate outlook, forward-looking inflation expectations have increased in line with tariff increases. The labour market remained resilient, with a stronger-than-expected 228,000 increase in payrolls and unemployment up slightly to 4.2%.

The Institute for Supply Management (ISM) Services Purchasing Managers Index (PMI) dropped sharply to 50.8 from 53.5, missing expectations and highlighting a slowdown in the US services sector. The report noted significantly slower new orders and notable employment weakness.

Consumer confidence declined for a fifth straight month to 86.0 from 92.9. Consumers rated short-term business and personal income prospects at the lowest level since 2011. Small business sentiment also weakened, extending its post-election reversal amid rising policy risks.

Despite a better-than-expected preliminary Q1 Eurozone GDP expansion of 1.2% and a European Central Bank (ECB) rate cut of 0.25%, Eurozone sentiment deteriorated sharply. Economic sentiment slumped in April to -18.5 from 39.8, the largest decline since Russia invaded Ukraine in 2022. The outlook for Germany remains deeply pessimistic, weighed down by rapidly shifting US trade policy.

Outlook

Looking ahead, investor vigilance is crucial as global economic and political developments continue to drive market sentiment. Tariffs will remain a key focus, and markets are likely to react positively to any significant de-escalation or hints of pro-growth policy shifts from the US administration. However, prolonged trade tensions increase the risk of a deeper US economic slowdown. The Australian economic outlook appears more favourable, less exposed to tariff fallout and supported by expected monetary policy easing.

The evolving economic and policy landscape in both the US and Australia underscores the importance of flexibility and active management in navigating market volatility.

Major market indicators

Sources: Quilla, Refinitiv Datastream

Summary

March was marked by heightened uncertainty surrounding President Trump’s tariff threats, significantly weakening investor sentiment. Concerns over a potential economic slowdown and the inflationary effects of tariffs drove fears, culminating in sharp global equity market selloffs with investors shifting to more defensive positioning.

Selected market returns (%), March 2025

Sources: *FTSE EPRA/NAREIT DEVELOPED, **FTSE Global Core Infrastructure 50/50 Index

Key market and economic developments in March 2025

Financial markets

Global equities continued to decline in March, with the MSCI World Index (USD) down 4.4%. Volatility increased, reflecting heightened uncertainties about the potential negative economic impacts of US trade and economic policies. Developed markets saw broad selloffs, while Chinese and Indian equities helped lift emerging markets. Bond yields remained largely stable.

Australian equities

The S&P/ASX All Ordinaries fell 3.5%, moving into negative territory for the year-to-date. Weakness persisted across sectors, with the MidCap 50 and Small Ordinaries indices declining 3.5% and 3.6%, respectively. Utilities gained 1.5% as investors sought defensive assets. Despite solid gains in industrial and precious metals, a 24% drop in the shares of James Hardie Industries, on the back of a significant acquisition announcement, weighed on the Materials sector, which closed 0.3% lower. Information Technology led declines for the second month, ending 9.7% lower, followed by the Consumer Discretionary sector, which fell 6.3%.

Global equities

US equities led developed market declines, with the S&P 500 (USD) down 5.6% to a six-month low. The Nasdaq (USD) posted a 7.7% drop, its worst quarter in nearly three years, as several mega cap technology stocks posted double-digit declines. Investor positioning continued to move away from US exposures in what has been a consensus overweight position in recent years. The Russell 2000 Index (USD) fell 7%, weakening further, as the economically sensitive sector’s performance was impacted by a more uncertain US economic outlook.

European equities also struggled, with the Euro 100 (EUR) declining by 1.9%. Nevertheless, the region concluded the first quarter with strong gains, largely driven by German large-cap stocks that were buoyed by expectations of increased government spending. The Hang Seng (HKD) rose by 0.8%, benefiting from positive investor sentiment following Chinese authorities’ pledges of economic stimulus. Indian equities rallied, with the Nifty 50 (INR) climbing 6.3%, recovering from oversold levels.

Commodities

Gold surged 9.6% to close at US$3122/oz, as investors sought a safe haven amid trade and geopolitical uncertainty. Precious metals, including silver and platinum, were also significantly higher, supported by a weaker US dollar. The copper price continued to rise, gaining 12.4%, supported by both Chinese stimulus and the threat of US tariffs on copper imports. Brent crude oil held steady at $72.35 per barrel.

Bond markets

Bond markets traded sideways in both the US and Australia. The Australian 10-year yield rose 5 basis points to 4.47% despite lower-than-expected domestic inflation. The US 10-year yield remained stable at 4.21% as the inflationary impacts of tariffs were weighed against a potential slowdown in US economic activity. Germany experienced a major bond selloff, with its 10-year yield surging 31 basis points in one day, the sharpest move since 1997, following a significant increase in government spending plans.

Economic developments

Australian growth improves with inflation continuing to moderate

Q4 GDP showed some improvement, rising slightly more than expected to 1.3% year-on-year, up from 0.8%. The underlying data highlighted stronger private consumer spending aided by income tax cuts, but productivity remained poor with GDP per hour worked falling by 1.2% over the year.

Consumer confidence rose 4% to a three-year high as consumers responded favourably to the Reserve Bank of Australia’s (RBA) mid-February interest rate cut. Consumers’ expectations of unemployment remained very low. The unemployment rate was unchanged at 4.1%, but employment numbers showed a surprising fall of 53,000, impacted by fewer older workers returning to the jobs market.

Monthly headline CPI rose 2.4% year-on-year, lower than the 2.5% economists had expected. In a positive signal for the interest rate outlook, stickier subcomponents of the CPI basket such as rent, insurance and new housing costs continued to show slower price increases.

Uncertainty clouds the US economic outlook while Germany lifts fiscal spending

The Trump administration’s volatile trade policy continued to raise levels of economic uncertainty. This negatively impacted “soft” economic data releases across both business and consumer surveys of current conditions and future expectations, where worries of rising inflation and slower growth hampered sentiment and activity levels.

The US Federal Reserve (Fed) held rates steady as expected. Chair Powell’s comments in the press conference highlighted the increased levels of uncertainty related to fiscal and trade policies and their subsequent impacts on both growth and inflation. The Fed revised their 2025 economic growth from 2.1% to 1.7% while revising the PCE inflation forecast higher from 2.5% to 2.8%. Expectations from the median Federal Open Market Committee (FOMC) are for two interest rate cuts this year.

Germany signalled a significant shift from a conservative fiscal stance where the government announced a €500 billion infrastructure investment fund alongside reforms to its “debt brake” rule, which traditionally capped borrowing. These changes are expected to allow for increased fiscal flexibility to address economic stagnation and geopolitical challenges.

Chinese authorities maintained their 5% GDP growth target for 2025 while also announcing a planned increase in the budget deficit from 3% to 4% of GDP, the largest in more than three decades. Additional stimulus measures were also announced to further boost the Chinese economy.

Outlook

The increasing risk of a global trade war has heightened investor fears of a US recession, leading to a repricing of global financial markets to reflect higher risk premiums. Although consensus forecasts still predict that the US will avoid a recession this year, persistent economic uncertainty could impede growth. However, a de-escalation of trade tensions and clearer trade policies could lead to market stabilisation and a potential recovery in risk assets after a significant derating.

In an environment where unsettling headlines often dominate the narrative, investors should not overlook the positive factors that can inform strategic decision-making. Successfully navigating this environment requires a disciplined yet dynamic approach to portfolio management.

Major market indicators

Sources: Quilla, Refinitiv Datastream

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