U.S.
U.S. markets entered August on solid footing, but volatility returned as investors assessed slowing growth against the Federal Reserve’s signals of easing. The labour market softened, with unemployment edging up to 4.2% in July, while core inflation accelerated to 3.1% year on year the fastest pace since January. The annual inflation remained steady at 2.7% in July 2025, unchanged from June. Economists cautioned that higher tariffs could soon feed through to consumer prices, though expectations for a September rate cut remained intact.
During his Jackson Hole speech on August 22, 2025, Federal Reserve Chair Jerome Powell indicated a shift in the Fed’s stance, potentially opening the door for an interest rate cut at the upcoming FOMC meeting in September. He emphasized the Fed’s commitment to its dual mandate of maximum employment and stable prices. He also highlighted a challenging macroeconomic situation where the labor market is softening while inflation remains above the 2% target.
While August is often perceived as one of the weaker months for stock market performance, the US stock market in August 2025 painted a more nuanced picture. Despite volatility and sector-specific weakness, both S&P 500 as well as the tech – heavy Nasdaq gained over 2.5% in August 2025 and even hit a couple all-time highs during the month. The information technology and communication sectors drove much of the gains, linked to artificial intelligence hardware and cloud platforms. Financial services also saw significant valuation increases due to net interest and fee income.
Commodity markets were similarly sensitive to geopolitics. Oil rallied late in the month as fears of supply disruptions from Russia outweighed concerns about a slowing U.S. economy. Brent crude settled at $68.80 per barrel on 25 August and West Texas Intermediate at $64.80, up roughly 1.5% and 1.8% respectively, after U.S. officials threatened more sanctions on Russian exports and drone attacks hit energy infrastructure. Analysts said the gains could falter if Trump’s tariffs dampened global demand. Gold prices fluctuated, initially retreating on stronger inflation but regaining ground as Treasury yields eased.
Eurozone
The Euro area delivered a rare upside surprise in August. The HCOB flash composite PMI rose to 51.1, the highest since May 2024, with manufacturing output expanding for the first time in three years as its PMI reached 50.5. Service sector growth eased but remained in expansion territory at 50.7. New orders improved and hiring increased, suggesting that the region was shaking off its winter recession. However, price pressures intensified service sector cost inflation accelerated to the highest since March, and output prices rose at its fastest pace in four months. Analysts warned that the European Central Bank (ECB) could not assume victory over inflation just yet.
The headline annual inflation rate in the Eurozone remained unchanged at 2% in July 2025. Although the figures were in line with the ECB’s projections, persistent services inflation and the threat of U.S. tariffs led markets to expect the Central bank to delay further easing until at least December.
Equity markets took the better data in stride. The Euro Stoxx 50 gained about 2% in August, aided by cyclical stocks. Yet the euro slipped to a one-month low against the dollar as traders braced for potential U.S. tariffs and a Fed easing cycle, and euro zone bond yields drifted up slightly on revived inflation concerns.
United Kingdom
The UK remained the laggard among advanced economies. Inflation advanced to 3.8% in July, its highest since early 2024, driven by rising airfare, electricity, petrol and soft drink costs. Food inflation saw its steepest increase in 18 months in August, further straining household budgets. Services inflation climbed to 5%, and the Bank of England (BoE) warned that price pressures would persist well into 2027. Wage growth near 5% and an employer payroll tax increase added to cost pressures. Markets have pushed expectations for the next BoE cut back to March 2026, reflecting scepticism that inflation will fall quickly.
The Hawkish BOE cut interest rates by 25 basis points to 4% in August, a move widely anticipated by analysts. However, this decision was not unanimous, with the Monetary Policy Committee (MPC) voting 5-4, reflecting the complexity of the economic situation and signalling slower easing pace going forward.
The FTSE 100 generated positive returns for the month and hovered near record levels before declining towards month end as sterling firmed and U.S. rate expectations shifted.
China
Chinese equities were among the world’s best performers with the MSCI China Index up roughly 25% year-to-date and the Shanghai Composite near a 10-year high after an 8% August gain. Much of the rally reflects a flood of domestic savings into equities, as households rotated deposits into stocks amid meagre bond and bank deposit yields.
The dividend yield on the CSI 300 index (around 2.5%) now exceeds the yield on 10-year Chinese government bonds (~1.7%). Analysts believe the rally could continue if state funds keep providing support and the U.S.–China trade truce holds, but they warn of bubble risk if the economic fundamentals fail to catch up.
Beneath the market optimism the Chinese economy remains fragile. The U.S. tariffs have depressed export orders; factories are cutting overtime and using temporary workers to reduce costs, contributing to underemployment and a “hidden” deflationary force. July consumer prices were flat year on year, and industrial profits were down 1.1% despite successive rounds of stimulusreuters.com. Youth unemployment remains high at 14.5%. Beijing responded by expanding consumer subsidies, easing property sector credit, and encouraging state-owned enterprises to buy unsold housing units. Yet the divergence between market exuberance and underlying demand underscores the challenge policymakers face.
Japan
Japan enjoyed relative calm compared with its peers. Consumer prices excluding fresh food rose 3.1% year on year in July, down from 3.3% in the previous month, marking the lowest reading since November 2024. Economists expect inflation to ease gradually but stay elevated enough to justify another rate increase later this year.
Policymakers have signalled that the U.S.–Japan tariff agreement, reached in July, reduces uncertainty and paves the way for further normalisation. At its July meeting the BoJ held its short‑term rate at 0.5% but signalled that conditions for tightening and rate increase to 0.75% could materialise within months. Most economists now anticipate a hike to 0.75% by year‑end.
The Japanese markets gained about 4% in August, buoyed by a weaker yen and resilient corporate earnings. Government bond yields edged higher on speculation of tighter monetary policy.
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Disclaimer
This article does not constitute tax or legal advice and should not be relied upon as such.
This Market Review is for general information purposes only and does not constitute financial, legal, or tax advice. Data has been sourced from publicly available materials, including the Federal Reserve, ECB, Bank of England, IMF, JPMorgan, Schroders, Reuters, and other official institutions. Past performance is not a reliable indicator of future results. You should always seek personalised advice from a qualified adviser.
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