Rotation away from US continues: Asian & European markets leading
Market Drivers 2H 2025
The U.S. enforces a 15% effective tariff rate, one of the largest post-war tax hikes on consumers. While markets treat new tariffs as temporary, their economic impact is real and disruptive. U.S. GDP is expected to weaken amid rising uncertainty. High U.S. equity valuations, combined with ongoing pro-growth policies in the rest of the world, are driving a performance gap between the U.S., Europe, and China. Resilient global growth and reduced recession risk support broader geographic diversification.
In the U.S.: Growth slows to 2%, inflation to rise, Fed easing still on track
Frontloaded imports have distorted GDP, but broader indicators show growth slowing below trend. We expect further deceleration in 2H25. Tariffs have had limited impact on inflation so far, but should lift it to ~3.1% by year-end. Despite this, the Fed is still expected to cut rates by 100bps starting in September due to labor market weakness.
In Europe: Uncertain growth at 1.5%, fading inflation, ECB easing likely to continue
Despite some tariff relief, uncertainty remains high and broad-based tariff increases are likely. Weak sentiment is expected to drag on domestic and external demand, with growth forecast at just 1% y/y. Disinflation continues, and we see inflation falling below 2% by end-2026, driven by lower energy prices and a stronger euro. One more ECB rate cut is expected this year, with further easing possible if global trade deteriorates.
In China: Solid growth at 5%, stimulus and monetary easing continues
May data points to solid Q2 GDP, supported by strong retail sales at 6.4% y/y. Exports slowed to 4.8% y/y on U.S. tariffs, but trade talks and partial tech agreements offer upside. With U.S. tariffs on China expected to stabilize near 40%, major fiscal stimulus is unlikely. Monetary easing continues, with another 100bps RRR cut and 30bps rate cut expected, supporting 2025 GDP growth near 5% and flat CPI.
Global equities: Strong gains year-to-date, fueled by strength in large-cap tech and AI-driven names. KOSPI 200 (+30.5%), Hang Seng China Enterprises (+19.0%), and Hang Seng TECH (+18.7%) have been the top performers.
Euro Stoxx 50 (+8.3%), Nasdaq 100 and NIFTY 50 (both +7.9%) are ahead of the S&P 500 (+5.5%), while Nikkei 225 trails with just +1.5%. Market volatility remains low, with the VIX slightly down at -0.6% YTD.
Fixed income markets: Solid gains for USD bonds, supported by falling yields and stable to tighter credit spreads. U.S. Treasury yields declined year-to-date, with the 2-year down 53 bps and the 10-year down 35 bps, pricing in rate cuts. Meanwhile, German 10-year yields rose 24 bps on increased defense-related spending.
Currencies: The euro (+13.3%) and AUD (+5.8%) gained strongly YTD, while the yen (-8.2%) and RMB (-2.2%) weakened against the USD.
Commodities: Gold (+25.3%) and copper (+26.2%) surged YTD, while oil fell (-9.2%).
Crypto: Bitcoin climbed 14.9% YTD on renewed adoption momentum.
Outlook 2025 H2: Resilient growth and rate cuts fuel global investment opportunities
Global equities rebounded strongly after early April’s dip, nearing record highs by mid-June. Momentum is slowing as the 90-day tariff pause ends and the economic impact of tariffs begins to show. Markets have priced in a positive outcome, but risks of re-escalation and weaker growth remain. While the “Trump put” may limit sharp declines, softer data this summer could add volatility. Equity upside is still expected over 12 months. High U.S. valuations and policy uncertainty increase the need for geographic diversification.
In the U.S.: Equities rally on earnings strength, policy support and AI momentum
U.S. equities have rebounded, with the S&P 500 near all-time highs (+5.5% YTD) as large-cap earnings remain resilient. Q2 earnings and policy support are boosting corporate cash flows, lifting 2025 earnings. Tariff impacts may drive short-term volatility through higher inflation and softer growth this summer. Rate cuts could resume in September, helping offset near-term headwinds. AI & Tech driven investment continue to support U.S. equity.
In Europe: Equities rally amid rotation out of the U.S.
The Euro Stoxx 50 is up 8.3% YTD. Europe’s outlook is improving, supported by defense and infrastructure spending. The region is outperforming globally, aided by a more pragmatic policy stance and capital market integration. Earnings face headwinds from weaker global growth, U.S. tariffs, and a stronger euro.
In China: Stocks rally on AI momentum, policy support, and strong earnings
The Hang Seng China Enterprises Index (HSCEI) is up 19% YTD. China’s tech sector is gaining more appeal, driven by easing U.S. tensions, strong AI momentum, and attractive valuations. Earnings growth in 2025/26 looks strong, backed by AI, cloud demand, and government support for tech self-sufficiency. Q1 results beat expectations, showing solid demand and accelerating AI-led growth. Within tech, internet firms focus on AI monetization, while EV makers use AI to boost production and innovation.
The USD is down over 10% trade-weighted YTD, led by gains in European currencies, while most Asian currencies lagged. A U.S. growth slowdown and expected Fed rate cuts from September should keep the USD under pressure. Manufacturing currencies like the RMB and JPY are likely to benefit.
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 3-year high at 1.1780, up ~13% YTD on broad dollar weakness
EURUSD has risen from near parity to a three-year high of 1.1780, as U.S. tariffs eroded confidence in the dollar’s reserve status. Further upside depends on clear signs of U.S. economic weakness, which are not yet confirmed. If U.S. growth or labor data deteriorate sharply, EURUSD could push toward 1.20.
USDRMB declines to 7.1650 from 7.37 high as gradual sell off resumes
The recent tariff deal in London has stabilized the RMB, with USDRMB trending lower since early May.
Stronger PBoC fixings and improved flows suggest the PBoC is comfortable with a firmer RMB. Appreciation is expected to be gradual and managed, given slower exports, deflation risks, and soft domestic demand.
USDJPY at 144.50 as yen rallied ~8% YTD on dollar weakness
USDJPY held steady in June after an 8% selloff year to date, as the BoJ left rates unchanged at 0.5%, citing growth uncertainty. Long-end JGB yields were flat, with quantitative tightening set to slow from April 2026. With the BoJ staying cautious, a drop in USDJPY will likely depend on upcoming Fed rate cuts. Hedging flows from Japanese investors and exporters should offer additional support for the yen.
In the first semester, falling yields and slightly tighter credit spreads delivered strong bond returns, despite volatility from Middle East tensions, U.S. policy shifts, and tariffs. Slowing growth and mild inflation have raised expectations for rate cuts, with most central banks easing or on hold with a dovish bias. Tariff uncertainty continues to weigh on activity, reinforcing accommodative policy stances. In credit, valuations are stretched, but high-grade and bank bonds remain attractive, with returns expected from duration and rate moves rather than further spread tightening.
How to benefit from the cycle of central bank rate cuts?
Bond yields remain elevated close to the 20-year peak, with wider credit spreads driven by political unrest in the U.S. and Europe. Yet, central bank support and solid growth are keeping defaults low, creating an attractive window to add fixed income. Bank bonds offer strong value, with yields near 6% in USD and 4% in EUR for 5–10 year maturities.
Gold: Up 25% YTD to USD ~3,300/oz
Gold hit a record high of USD 3,500/oz in the first semester before pulling back 5% to USD 3,300/oz. Despite volatility, in the first half of the year, demand was strong at 1,300 metric tons, the highest since 2016, driven by central banks and ETF buying. ETF inflows reached a three-year high, led by U.S. funds with support from Europe and Asia. Gold remains a preferred asset during global uncertainty, with growing interest from long-term investors amid de-dollarization trends.
Oil: Down 9% YTD at USD 65/bbl., volatile on Middle East ceasefire news
Oil prices have been highly volatile, with WTI falling to USD 65/bbl. after President Trump announced a potential Israel-Iran ceasefire. Despite no disruption to energy flows, uncertainty remains, and markets will monitor whether the ceasefire holds. Hedging activity has picked up, and while U.S. shale investment stays cautious, higher prices may support production; physical markets remain tight but could ease later in the year.
Copper: Up 26% YTD to USD 11,100 per metric ton on telecom and EV demand
Copper’s early-year outlook was driven by limited supply growth and expectations of stronger demand from rate cuts and fiscal support. The copper market is likely to stay tight, supporting continued positive price momentum. Prices could reach USD 11,250/metric ton or higher if current conditions persist.
