• U-Turn dents Trump's credibility
• US dollar under pressure
• Equities rally, but earnings expectations are down

Global financial markets staged a notable rebound in May, ending a three-month sequence of declines that began in February. Investor sentiment improved substantially as concerns over escalating trade tensions eased, with many market participants increasingly sceptical about the actual implementation of US tariff threats. The MSCI All Country World Index (ACWI) rose 5.7% over the month, while US equities, represented by the S&P 500, gained 6.3% - the strongest monthly increase for both indices since November 2023.

In Europe, the MSCI EMU extended its year-to-date return to 14.4%, making it the leading performer among major global indices. The MSCI China Index recovered, advancing 3.6% in May and pushing its year-to-date gain to 13.8%, supported by optimism that emerging markets remain relatively insulated from direct trade war impacts for now.

Investor confidence was bolstered as the Trump administration responded more sensitively to market and political pressures. Notably, US-China trade negotiations showed progress, with both parties agreeing to a 90-day pause in new tariffs, reassuring markets that dialogue remained open. Another source of optimism was a trade agreement between the United States and the United Kingdom. However, the latter half of May was marked by renewed volatility. President Trump’s threat to impose a 50% tariff on EU imports was quickly postponed, allowing more time for negotiations and averting immediate market disruptions. Nonetheless, tensions with China escalated again later in the month. Concurrently, legal challenges to the US administration’s tariffs gained momentum; a US trade court declared several tariffs unlawful, although most remain in place pending further legal proceedings.

From a macroeconomic perspective, US economic data remained mixed, but generally resilient. Labor markets showed continued strength, with unemployment rates at historically low levels and steady wage growth. However, inflation pressures persisted, with core PCE inflation still above the Federal Reserve’s 2% target. Sentiment indices, such as ISM and PMI readings, suggest moderate growth with some weaknesses in the services sector. Regional indicators also reflected improving business investment sentiment. Importantly, consumer income growth remained healthy, supporting stable consumption trends despite subdued consumer confidence. In Europe, economic performance was modest. First-quarter GDP growth in the eurozone was revised slightly downward to 0.3%, with stronger external trade helping to offset weaker domestic demand. German industrial production and exports provided relative strength, though service sector data pointed to ongoing contraction. Overall, the European Central Bank (ECB) signaled a cautious approach to monetary policy normalization, balancing growth concerns with inflation risks, particularly as headline inflation moved closer to target levels. In China, the economic outlook showed signs of stabilization, with modest improvements in industrial production and retail sales. Yet, structural challenges, including weaknesses in the real estate sector and demographic trends, continued to constrain the medium-term growth trajectory.

Despite the equity rally, bond markets showed growing fiscal concerns. In the US, the proposed “One, Big, Beautiful Bill” raised fears of further debt accumulation. Bond yields moved higher, with the Bloomberg US Treasury Index declining by 1% in May but remaining 2.5% up year-to-date. The benchmark 10-year yield continues to hover around the 4.5% threshold that has proven to be a headwind for stock multiples. In Europe, the Bloomberg Pan-European Aggregate Index edged up by 0.1% in May, extending its year-to-date gain to 1.6%. Meanwhile, 20-year US Treasury yields rose above 5%, reflecting persistent concerns over debt sustainability and inflation expectations. The evolving fiscal landscape is emerging as a key factor influencing duration risk, especially as markets reconsider the trajectory of interest rates and inflation for the second half of the year. Meanwhile, the USD´s 8% decline against virtually every major currency hints at a rebalancing of global capital flows, potentially ushering in a longer-term period of weakness.

Commodity markets delivered mixed performance. The UBS CMCI Composite USD Total Return Index advanced 1% during the month. Gold posted its first monthly decline of 2025, falling 0.6% as easing policy uncertainty and risk-on sentiment reduced demand for safe-haven assets, though gold remains up 24.4% year-to-date. Gold`s strength, despite its diminished role as a traditional safe haven, signals a global shift toward central bank reserve diversification and heightened focus on risk management - highlighting that risk premiums in other asset classes may not be providing much shelter from any potential market turbulence. Meanwhile, brent crude oil prices recorded their first positive monthly return of the year, rising 2.3% amid tight supply conditions and heightened geopolitical tensions, yet remain down 11.1% for the year.

After a stunning marker reversal spurred by the 90-day tariff pause and talks of a trade truce with China, stock markets and credit spreads are now about back to where the were in early January. On paper, it ´s almost as if all of the tariff-related and confidence-shocking events of the past few months never took place. While equity and credit investors are celebrating the recovery, participants in other major asset classes remain more cautious. Beneath the optimism reflected in rising stock prices, movements in Treasuries, the US Dollar, and gold suggest a more nuanced and challenging macroeconomic environment that stock and credit markets may be overlooking. While we acknowledge that the resilience of the US economy and its current momentum have lowered the likelihood of an imminent recession, and that the S&P 500 may now be on track for further gains on a 12-month horizon, we remain still cautious on the optimistic outlook. After the recent rally, the near-term risk reward for equities is more balanced, in our view. Expectations for favourable trade negotiations are already elevated, while weaker economic data might follow as the US economy adjusts to higher tariffs. Given the prevailing backdrop of elevated valuations in the US, modest earnings momentum in Europe and lingering geopolitical risk, we maintain a neutral position on equities.

Please find attached our last Asset Allocation Update for June.