Equities rally on AI, defense investments and resilient growth
Uncertainty over U.S. tariffs is unsettling businesses and consumers, posing a medium-term risk to growth and a short-term bump in inflation. High U.S. equity valuations, combined with ongoing pro-growth policies abroad, are driving a performance gap between the U.S., Europe, and China. Global growth remains resilient and recession risks are easing. This environment supports investments while diversifying geographically. Europe and Asia are gaining traction as some capital rotates out of U.S. assets.
In the U.S.: Growth slows to 2.1% as tariff risks mount and Fed recalibrates
The U.S. economy is not in recession, but growth is clearly slowing and downside risks are rising. Tariffs are hitting demand, with goods imports plunging nearly 20% and consumers pulling back. The Fed has downgraded its growth outlook, reflecting the economy’s loss of momentum. Inflation declined to 2.3% year on year, the slowest pace in over four years. Trade policy uncertainty may push the Fed to deliver faster the four rate cuts currently expected in the next 12 months.
In Europe: The Eurozone responds to Trump with fiscal firepower as ECB stays on easing path
Trump’s actions are prompting Europe to act, with Germany’s fiscal stimulus and EU defense plans offering long-term growth potential. These measures will take time to have impact, likely not before 2026. In the short term, fiscal expansion may push European bond yields higher, narrowing the gap with U.S. yields. However, the European Central Bank (ECB) still has room to cut rates, especially after its recent growth forecast downgrade to 1%.
In China: Beijing ramps up stimulus to counter trade tensions and boost domestic growth
China’s government stimulus is supporting positive sentiment despite rising U.S. trade tensions. In May, the People’s Bank of China (PBoC) cut the reserve requirement ratio (RRR) by 50bps, injecting RMB 1tn in liquidity. It also lowered the 7-day reverse repo rate by 10bps to 1.40% to ease funding conditions. A new RMB 500bn lending facility will support consumption, elderly care, and tech. Lending programs for agriculture and SMEs will also be expanded to boost domestic growth, with a target of 5%.
Global equity markets rallied in May, with U.S. equities rebounding sharply—S&P 500 up 6.2% and Nasdaq up 9.0%—despite ongoing concerns over tariffs and slowing growth. Europe and Asia outperformed YTD, led by China’s stimulus-fueled momentum (HSCEI +15.7%) and Korea’s strong rebound (KOSPI 200 +13.2%).
Bond yields rose across the U.S. and Europe on fiscal expansion and fading recession fears, while inflation remained muted. The ECB signalled continued rate cuts, even as European yields crept higher, narrowing the gap with the U.S.
The U.S. dollar declined further, with EURUSD up 9.0% YTD as capital rotated into Europe and Asia.
Gold paused after a strong run (+25.1% YTD), while copper and oil gained in May on improved risk appetite.
Bitcoin soared 10.6% in May, driven by USD 6.3bn in ETF inflows and growing demand amid global monetary easing.
Outlook: Resilient global growth and easing recession risks support investments, taking opportunities, and diversifying across regions.
Diversification across regions is a must in global equities as Trump’s policy swings weigh on sentiment and cloud U.S. earnings visibility. High U.S. valuations add to the risk, making geographic diversification more important. Europe and China have benefited from the rotation, but future gains will depend on earnings strength. Concentration risk reduction and regional diversification should help capture upside potential.
In the U.S.: Equity resilience faces test as AI leadership fades and policy risks rise
U.S. equities showed resilience in May, with the S&P 500 heading for its strongest May since 1990 (+6.2%), despite flattish YTD returns. DeepSeek’s rise in 2025 has challenged the U.S. lead in AI, pressuring sentiment around U.S. tech dominance. Trump’s new policy package has added uncertainty, weighing on investor confidence. The valuation premium of U.S. stocks is shrinking amid global competition and policy headwinds. Nvidia reported a hit from export restrictions to China, with CEO Jensen Huang warning of broader tech sector risks. These developments may lead to a reassessment of the long-term investment case for U.S. equities.
In Europe: Equities rally amid rotation out of the U.S.
The Euro Stoxx 50 is up 9.6% YTD. European domestic stocks are gaining momentum, benefiting from deep discounts after years of underperformance. Utilities led the rally, up 20% in March, supported by rising power demand—up 2% after 15 years of decline. Limited reliance on U.S. exports and supportive fiscal and monetary policies strengthen the outlook. The ECB cutting rates and demand recovering underpin European equities. Yet, the low growth at around 1% is a limiting factor.
In China: Equities resilient amid tariff uncertainty
The Hang Seng China Enterprises Index (HSCEI) is up 15.7% YTD, leading global markets for the second year in a row. Upcoming stimulus measures aim to boost demand and stabilize fundamentals, reinforcing market confidence. Policy support could help offset tariff pressures and sustain outperformance. We remain bullish on long-term growth sectors like AI, tech, and new energy. Improving fundamentals and supportive policies are lifting sentiment and valuations in the Hong Kong and mainland markets.
Dollar under pressure as growth slows and policy risks rise
The U.S. dollar is down 10% this year, pressured by slowing U.S. growth and Trump-related policy uncertainty. Tariffs, Fed rate cuts, a widening deficit, and trade imbalances point to further USD weakness. Manufacturing currencies like the RMB and JPY are likely to benefit from this trend.
Rising FX volatility driven by tariff risks supports a proactive hedging approach. We recommend hedging EUR, RMB, and JPY exposures to manage currency risk.
EURUSD near 3-year high at 1.14, up ~10% YTD on broad dollar weakness
EURUSD has risen from near parity to a three-year high of 1.15, as U.S. tariffs eroded confidence in the dollar’s reserve status. While retaliatory trade measures initially triggered broad market sell-offs and USD weakness, EUR downside risk persists due to ongoing ECB rate cuts, weak growth, and the ongoing Russia-Ukraine conflict.
USDRMB declines to 7.20 from 7.37 high as PBoC anchors FX stability
Amid ongoing U.S.-China trade tensions, USDRMB has edged lower from its all-time high of 7.37, as the PBoC anchors daily fixings. Authorities are expected to limit excessive currency moves, aiming to maintain macro stability in the face of external shocks.
USDJPY at 143 as yen rallies ~10% YTD on tariffs and flight to safety
The Japanese yen rallied sharply after Trump’s broad tariffs, as deteriorating risk sentiment drove safe-haven demand. A narrowing U.S.-Japan rate differential amid growing Fed cut expectations added to the JPY strength, while USD fell to multi-month lows. With the Bank of Japan (BoJ) signalling potential rate hikes amid rising domestic inflation, policy divergence points to continued JPY outperformance and downside pressure on USDJPY.
The growth optimism that was reflected in U.S. bond yields when Trump’s election victory gained ground has now turned into a growth scare coming from the uncertainty on his tariff policies: U.S. 30-year bonds dropped 10% in May as yields hit 5%. Markets are pricing in 100bps of Fed cuts over the next 12 months. With equities declining year to date in 2025, bonds have outperformed and the bond-equity correlation has turned negative—restoring their diversification benefits.
How to benefit from the cycle of central bank rate cuts?
Bond yields remain high relative to the historical level of the past 20 years, with wider credit spreads reflecting political unrest in the U.S. and Europe. Despite this, central bank support and resilient economic growth are keeping default rates low, creating a prime opportunity to increase fixed income exposure. Investors can lock in high rates by investing in bank bonds, yielding nearly 6% in USD and 4% in EUR over 5-10 years.
Gold: Up 25% YTD to USD 3,300/oz, rally stalls as risk appetite returns, but demand stays strong
Gold prices have plateaued as risk appetite returns and tariff tensions ease. The post-“Liberation Day” rally has stalled, reducing gold’s appeal as a risk hedge. However, medium-term demand remains strong, driven by central bank buying and rising ETF inflows. Diversification out of USD into gold is expected to continue or accelerate.
Oil: Down 15% YTD at USD 60.80/bbl as supply rises and U.S. policy pressure mounts
The Trump administration is pushing to lower oil prices to contain inflation. OPEC’s plan to increase output by 0.5m barrels per day from June adds downward pressure. Supply-demand dynamics and policy uncertainty are keeping prices subdued. Oil is down 25% since its January peak.
Copper: Up 17% YTD to USD 10,260 per metric ton on telecom and EV demand
Copper prices have dropped from March highs on tariff-driven demand fears and rising U.S. recession risk while retaining +16.7% performance YTD. Near-term supply remains tight, while expected Fed cuts and further Chinese stimulus may support prices. Supply constraints should keep a floor under copper, reinforcing the need for investment in new capacity.
