U.S.
U.S. markets continued to grapple with the ripple effects of President Trump’s recent trade policy announcements throughout May. Mixed economic signals and a recalibration of interest rate expectations whipsawed investor sentiment. At its May 6–7 policy meeting, the Federal Reserve held interest rates steady at 4.25%–4.50%, maintaining a cautious stance amidst what it described as “dual threats” of persistent inflation and rising unemployment.
Minutes released on May 22 revealed that nearly all Federal Open Market Committee (FOMC) participants expressed concern that progress in reducing inflation had stalled, while job market resilience began to show signs of softening. Policymakers acknowledged that the path forward remains highly uncertain, with several members noting the risk of stagflation, particularly if trade disruptions translate into higher prices while simultaneously dampening consumer demand.
Despite this macroeconomic noise, U.S. equities posted a solid monthly performance, with the S&P 500 advancing 6%, led by strength in the technology and healthcare sectors. Treasury yields eased during May, and investor aversion to long-dated government debt appears to be rising. Markets are now pricing in a growing possibility of rate cuts later in the year if economic activity continues to slow.
Retailers and manufacturers also responded to growing cost pressures. Walmart, Target, Macy’s as well as Ford announced further price hikes in May, citing elevated input costs tied to tariff uncertainty. While inflation data for April showed headline CPI slowing to 2.3% and core CPI to 2.8%, the persistence of cost pass-through effects suggests that underlying inflation risks remain skewed to the upside.
Eurozone
The Eurozone’s economic outlook remained clouded by subdued activity and renewed trade concerns in May. The European Central Bank (ECB) kept its key interest rate unchanged at 2.25%, following a 25 basis point cut in April. In her May 9 press conference, ECB President Christine Lagarde acknowledged the need for continued caution, highlighting that although inflation is slowing, the economic backdrop is vulnerable to external shocks, particularly from trade tensions with the United States.
The European Commission’s Spring 2025 Forecast, published mid-May, revised Eurozone GDP growth down to just 0.9% for the year, a marked deceleration from earlier projections. Inflation was forecasted to ease to an average of 2.1%, reflecting weaker demand and normalising energy costs.
Despite the lacklustre macro backdrop, investor sentiment towards the EU appeared to strengthen. A Eurobarometer poll published on May 28 found trust in the European Union had reached its highest level since 2007, with 52% of respondents across the bloc expressing confidence in the EU’s institutions. Among young people aged 15–24, trust rose to 59%.
Euro equities climbed 4% during May, with cyclical sectors outperforming, while sovereign bond spreads in peripheral economies widened slightly on fiscal sustainability concerns.
UK
The Bank of England surprised markets by announcing a 25 basis point rate cut on May 8, bringing the base rate down to 4.25%. This marked the first reduction since early 2023 and reflected the Bank’s growing concern over the secondary impact of U.S. tariffs on UK export performance and broader financial stability. The Monetary Policy Committee vote was divided, with five members voting for the cut, two pushing for a more aggressive 50 basis point reduction, and two preferring to leave rates unchanged.
However, optimism around monetary easing was short-lived. UK inflation data revealed an unexpected acceleration in consumer prices, with CPI rising to 3.5% in April—up from 2.6% in March. This sharp increase was driven by airfare, utility bills, and recreation services. Chancellor Rachel Reeves called the inflation rise “disappointing,” reinforcing that the government remains focused on cost-of-living relief efforts.
On the geopolitical front, momentum gathered around the newly announced UK–U.S. trade agreement. On May 29, it was confirmed that the UK government is seeking to expedite implementation of the limited pact, which retains key U.S. tariffs on UK goods but offers improved market access in some sectors. Analysts believe the deal, while modest, could strengthen political ties and provide a framework for further trade liberalization.
The FTSE 100 rose 2.6% in May, bolstered by solid performance in energy and financials. However, bond markets turned more volatile towards month-end as traders recalibrated rate expectations following the inflation surprise.
China
China’s economy remained under pressure in May, with industrial activity contracting for the second straight month. The official Manufacturing PMI, released in early May, showed a reading of 49.0 for April, indicating contraction. In response, Beijing unveiled a new round of targeted stimulus measures, including liquidity injections into policy banks and fiscal support for local governments and infrastructure projects.
Chinese equities benefited from tariff relaxation, with the Shanghai Composite up 0.8% for the week and the Hang Seng index in Hong Kong rising 2.1%. Gains were more prevalent following the news of the US–China trade deal, though enthusiasm began to wane as an improved trade picture dampened expectations for further government stimulus. Analysts remain cautious, citing fragile domestic demand and external vulnerability.
The move by the United States and China to reduce import tariffs and negotiate has been broadly welcomed by markets. However, this de-escalation will do very little to restore trade in energy commodities. World markets have latched onto the prospect of a gradual rollback of U.S. tariffs to extend their recent recovery from April’s trade shock.
Japan
Japan’s economic backdrop remained relatively stable in May, with subdued volatility across equity and bond markets. The Bank of Japan left its policy stance unchanged at its May meeting, continuing to pursue gradual normalisation. Policymakers noted that while core inflation remains above 3%, sustainable wage growth has yet to materialise.
Japan’s core inflation in April rose to 3.5%, driven largely by reduced energy subsidies and increased food prices, especially rice. This acceleration was at its fastest annual pace in more than two years in April, raising the odds of another Bank of Japan interest rate hike by year-end.
Manufacturing PMI data showed modest improvement, with the index rising to 48.5—still in contraction territory, but at its highest level in several months. New export orders, however, continued to decline, reflecting weak global demand.
The Nikkei 225 closed the month up 5%, supported by strong earnings from exporters and a broadly weaker yen.
Overall, May 2025 saw global markets navigating a complex landscape dominated by U.S. trade policy uncertainty and its ripple effects on inflation and growth expectations worldwide. While some regions demonstrated resilience, the pervasive theme was a recalibration of central bank stances and investor sentiment in response to shifting geopolitical and economic tides.
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Disclaimer
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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