The latest market commentary from our investment partners at J M Finn, reflecting on Q2.
Since inauguration day in January, it has seemingly become the norm to expect market influencing headlines on a daily basis, with the White House (or Truth Social) being the most prominent contributor. The quarter began with President Trump’s so-called ‘Liberation Day’, which saw him announce sweeping ‘reciprocal’ tariffs (a tax on imported goods) across US trading partners. Subsequently, we observed the largest market sell off, particularly within the US, since the initial outbreak of the Covid-19 pandemic in 2020. Investors were rightly concerned that tariffs of the magnitude originally proposed (circa 25% on average) would create a major supply side shock to the US economy, raising prices, damaging supply chains and depressing business and consumer confidence.
Furthermore, a significant slide in US government bond prices and a sharp correction in the US Dollar caused further financial stress, following President Trump’s comments that he was actively considering replacing the US Federal Reserve’s Chairman, Jerome Powell, given the latter’s reticence to lower interest rates. This attack on the US central bank’s independence forced President Trump to announce a 90-day pause until July 9th (next week) for the additional ‘reciprocal’ tariffs. In consequence, the induced market volatility was short-lived, and the market rebounded on the back of the announcement. However, US equities have been the worst performing asset class over the first half of the year falling -2.9% due to the impact of the US Dollar weakening -10% verses sterling.
Central Banks have behaved differently given the varying impact tariffs have had on their domestic economies. The US Federal Reserve is currently seeking more clarity on the impact of tariffs on employment and inflation before recommencing its easing cycle (much to the frustration of President Trump); the Bank of England has looked through above target inflation and, after May’s 0.25% rate cut, continues to guide the markets to expect a gradual rate cutting cycle in the months ahead. The European Central Bank and the Swiss National Bank have used below target inflation as cover for more aggressive rate cutting cycles, while the Bank of Japan is on a path of gradually increasing its policy rate as its economy has successfully exited its deflationary spiral.
In this environment, European, UK and latterly Asian equities have generally fared better than their US counterparts. Within Europe, German equities have been the standout performer, rallying strongly on an unprecedented German commitment to boost defence and infrastructure spending by more than EUR1trn in the years ahead. In addition, the EU Commission proposed that member states could significantly increase defence spending without breaching the EU’s deficit rules.
Towards the latter end of the quarter, we saw tensions in the Middle East heighten once again, with Israel and Iran trading airstrikes. The US then took the opportunity to attack Iran’s nuclear enrichment facilities to which Iran retaliated, a move which sparked fear of a potential breakout of an all-out-war. An event such as this usually sparks a hike in oil prices, however the opposite was observed, and traders correctly predicted an immediate de-escalation of the conflict.
Looking ahead, with the White House’s focus shifting to prospective US tax cuts and deregulation, markets await Trump’s so called ‘Big Beautiful Bill’ and the potential repercussions in the next chapter of his administration. The implementation of said bill is expected to provide a strongly reflationary impulse, so the prospects for US growth look somewhat better ahead of the Autumn 2026 US Midterms. President Trump will be keen to see good news on the economy and financial markets before this date so as to portray himself as a President whose policies are allowing Americans to feel better than they did than under Biden.
Freddy Colquhoun
Investment Director
Please note that the value of investments and the income from them may go down as well as up and you may not receive back all the money you invest. Past performance is not a reliable indicator of future results. The views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any securities.
