President Trump, tariffs and trade deals dominated the headlines, but the constant flow of news did little to disrupt US equities, with new highs reached against the backdrop of positive momentum and low volatility.  UK equities also contributed to the positive outcome for global equities, with the blue-chip index enjoying a stellar month.  Alongside other core government bond markets, UK gilts lost ground against the backdrop of continuing nervousness about the financial health of developed economies.  Credit spreads compressed further, helping corporate and high yield bonds to deliver positive total returns. 

Backdrop

• UK economics:  UK data releases reflected the lacklustre economic picture.  GDP contracted by 0.1% in May and industrial production declined by 0.9%.   Retail sales rebounded from last month’s drop but still missed expectations, while consumer price inflation picked up to 3.6% on the back of higher food prices and persistent services inflation.  The employment market weakened, with the number of payrolled employees falling in June and wage growth also slowing.  Indeed, a report by KPMG and the Recruitment and Employment Confederation indicated that hiring by UK businesses has plunged due, in part, to the fallout from the National Insurance hike. According to the Halifax, house prices stalled in June and the annual growth in the Halifax House Price Index slowed to 2.5%.  On a more positive note, the IMF forecasted that UK economic growth will surpass other major European economies this year and next.
• UK politics: Prime Minister Starmer abandoned his flagship welfare reforms to avoid a humiliating parliamentary defeat, leaving his government facing a deepening fiscal hole.  The sight of Chancellor Reeves visibly upset during Prime Minister’s Questions prompted speculation about her future, which rattled the UK gilt market.  Reinforcing the budgetary worries, public sector net borrowing widened sharply, driven by an increase in debt interest payments.
• Global economics:  In the US, strong labour market data soothed concerns about a slowing economy, although the underlying labour data showed that hiring across many parts of the economy was weakening.  At the same time, data showed that companies are passing on the costs of rising wage and tariffs to their customers. There were also signs of waning business confidence across sectors amid concerns about federal spending cuts and tariffs, while consumer sentiment appeared to be holding up.  The annual inflation rate accelerated to 2.7%, causing markets to pare back expectations for US interest rate cuts.  Chinese data continued to reflect the subdued global trade conditions, with new orders and foreign sales declining.  However, rare earth exports surged following a series of accords between the US and China aimed at restoring global supply chains.  The economy expanded by 5.2% year on year, slightly better than expected due to Beijing’s efforts to support economic activity.  German factory orders dropped on evidence that businesses were wary of committing to large investments while trade uncertainty persisted, a situation that was reinforced by a reported decline in exports, particularly to the US.  It was a similar picture in Japan, where exports to the US plunged.
• Monetary policy:  The European Central Bank left rates unchanged, marking a pause in an easing cycle that has seen eight cuts over the past year.  Policymakers chose to stand pat as they evaluated the impact of trade uncertainty, acknowledging the challenges of assessing how tariffs will affect prices.  Similarly, the Federal Reserve chose to leave rates at the same level, defying pressure President Trump.  The Bank continued to eye the inflationary impacts of upcoming tariffs.  Ahead of the next Monetary Policy Committee meeting in August, the Bank of England Governor commented that a cautious approach to lowering rates is needed to squeeze out stubborn price pressures, but equally, he acknowledged signs of softening in the economy and labour market.  The People’s Bank of China kept rates at record lows against the backdrop of slowing growth momentum and trade disruption, and the Bank of Japan continued its cautious approach to policy normalisation, holding rates at 0.5%.
• Global politics and events:  President Trump’s controversial One Big Beautiful Bill Act (OBBBA) was passed; it extends tax cuts implemented in his first term and allocates huge sums to defence and immigration enforcement, while at the same time cutting funding for healthcare programmes, food assistance and clean energy projects.   As President Trump’s tariff deadline of 1 August approached, there was a flurry of trade deal activity.  In late July, Japan and the EU both agreed frameworks that lowered the tariff on most exports – including autos – to 15%.  Both countries also agreed to invest large sums in the US economy.  The US-EU deal drew sharp criticism from European leaders.  At the start of August, the President followed through on his threats towards countries without a deal, which saw Brazil hit with a 50% levy, Switzerland with 39%, Canada with 35% and India with 25%.  China will suffer tariffs in excess of 25% across the board.  Also consequential was the elimination of the tax exemption on small international shipments; this means that low-cost items will now be taxed, thereby raising prices for American consumers.  In Japan, the ruling coalition lost its majority in the upper house election.  While Prime Minister Ishiba is expected to remain in office, markets are concerned that the opposition will push for expanded government spending and tax cuts.

Equity markets

• Global equities continued to climb against the backdrop of geopolitical challenges, the looming tariff deadline and questions about the economic consequences of major trade shifts.
• US markets chalked up another month of positive returns, with the large-cap indices touching all-time highs against a backdrop of low volatility.  By the end of July, the main US market had rallied by close to 30% (in local currency) since the April low, an incredible surge that has been driven by unrelenting positive momentum, the return of AI enthusiasm and retail investor speculation.  Strong earnings results from some of the technology giants reinforced the AI fervour and allayed concerns about the huge capital expenditure cycle that is under way.  The passing of the OBBBA also bolstered sentiment towards cyclical companies, as well as smaller-cap companies.  This helped the mid and smaller-cap indices to keep pace with the rises enjoyed by the main market.
• The UK was a top performer on the global equity stage, with equities cheered by good corporate earnings from the likes of AstraZeneca and Barclays.  The energy and materials sectors performed strongly thanks to upward earnings revisions, and the banking sector built further upon the strength of share prices seen already this year.  The blue-chip index outperformed the mid and small cap indices by a significant margin.  Looking at the year-to-date performance of the main index, it has outperformed other developed market peers.
• Meanwhile, European equities struggled to make headway this month, held back by concerns about the impact of trade policies on the technology heavyweights, as well as ongoing headwinds due to weak demand from China.
• Japanese equities rose, rallying sharply after the trade agreement with the US was reached.  The returns from other Asian and emerging markets were mixed.  A robust return from Chinese equities contributed to the positive outcome for regional indices overall.  The Taiwanese and Korean markets also performed strongly, with Taiwan benefiting from global enthusiasm for technology and AI plays, and Korea continuing this year’s strong rebound, with investors attracted by the fundamental reform story.  On the other side of the coin, the Indian and Brazilian indices fell due to trade tensions with the US.
• Style-wise, growth was in the vanguard in the US, thanks to strength from the technology sector.  Elsewhere, value was in the driving seat.

Bond markets

• Against the backdrop of continuing nervousness about the financial health of developed economies, there was upward pressure on sovereign bond yields.
• UK gilt yields came under additional pressure when questions were raised about Chancellor Reeves’ future, with investors fretting that potential successors may loosen the fiscal purse strings further.  Longer maturity bonds underperformed due to intensifying worries about the UK’s financial position, with a relatively hot inflation print also an unhelpful development.
• Japanese bonds were under the spotlight, with the market responding negatively to the ruling LDP losing its majority.  A sticky inflation backdrop added to the unease, which saw 10-year yields touching their highest level since 2008.
• Credit markets outperformed government bond markets and mostly eked out positive total returns, supported by positive risk sentiment and strong corporate earnings.

Commodity and currency markets

• The oil price rose modestly but it was a choppy month, as the commodity responded to supply/demand factors.  Production hikes by OPEC+ and reduced global demand for oil weighed upon sentiment, while a downward revision to US production forecasts and supply concerns because of renewed Houthi attacks in the Red Sea and sanctions against Russia lent support to the oil price.
• The copper price surged after President Trump touted a 50% tariff on US imports, aimed at bolstering domestic production.  Later, the price plummeted by 30% as Trump announced that the new tariffs would only apply to semi-finished products, thereby exempting key imports.
• The gold price was range-bound and little changed over the month, with its safe-haven appeal dampened by the positive sentiment around announced trade deals.
• Currency-wise, UK sterling weakened versus the US dollar and the euro due to concerns about the UK’s economic outlook and fiscal health, leading to expectations that the Bank of England will cut interest rates in the coming months.  The weaker currency boosted the returns of unhedged overseas exposures within UK investors’ portfolios.