August Market Update

Equities Reach New Highs Amid Trade Shifts

Global equity markets continued their rally in July, with several major indices hitting record highs – notably the UK’s FTSE 100 reached an all-time peak. The UK market has led Eurozone peers year-to-date, boosted by strong performances in sectors like mining and defence on expectations of increased NATO-related spending. More broadly, investor sentiment remained upbeat despite geopolitical headwinds: markets largely shrugged off concerns about higher tariffs and potential drag on growth. In fact, the US struck new trade agreements with the EU and Japan in late July, instituting a 15% tariff on imports but securing hefty investment pledges (around $600bn from the EU and $550bn from Japan) into the American economy. While these deals appear one-sided in favour of the US, they provide much-needed certainty for businesses by averting a deeper trade war, a positive sign that helped lift equities. Emerging markets also saw gains, supported by signs of resilience in China’s economy and continued enthusiasm for the technology sector. The key question is whether this market momentum can hold up as the impact of higher tariffs gradually filters through to corporate earnings and economic data.

Inflation Stubborn Despite Easing from Peaks

Inflation remains a persistent challenge globally, even as it has cooled from recent highs. In the United States, headline consumer prices ticked up – annual inflation rose from 2.4% to roughly 2.7% in July, edging further above the Federal Reserve’s 2% target. Core inflation (excluding food and energy) is running around 2.9%, indicating that underlying price pressures are still significant. A notable driver has been rising goods prices, where tariffs are starting to push up costs for consumers. In the UK, inflation is even stickier: annual price growth was about 3.6% as of June, and progress toward the 2% goal is expected to be painfully slow. Strong wage growth and expensive services are keeping British inflation elevated, complicating the outlook. On a brighter note, the Eurozone has seen inflation fall closer to the European Central Bank’s target – around 2% on average – though this masks higher rates in some member countries. Overall, while price pressures have eased from the peak levels of a couple years ago, inflation remains above comfort levels in many economies, limiting central banks’ room to stimulate growth.

At the same time, global growth signals are mixed. The U.S. economy rebounded sharply in the second quarter, with GDP expanding at a 3% annualised rate after a contraction in Q1. However, that surge was flattened by a steep drop in imports (which boosts GDP math by improving net exports), suggesting the headline growth overstates the economy’s underlying strength. In fact, when looking at the first half of 2025 overall, U.S. GDP grew a modest 1.2%, and forecasts put full-year growth around 1.5% – roughly half the pace of 2024. Other regions show a similar story of cooling momentum. Europe’s growth has been constrained by trade uncertainties, and China’s recovery, while improving, remains fragile. This backdrop of slowing growth alongside persistent inflation (a stagflation-like mix) is challenging for policymakers and investors alike.

Central Banks Stay Cautious

Major central banks largely held their ground in July, choosing caution amid an uncertain economic environment. The U.S. Federal Reserve left interest rates unchanged (holding at a 4.25–4.50% range) for another meeting. This decision came despite open pressure from President Donald Trump to cut rates – he has argued for easier policy to spur growth and, notably, to reduce government debt financing costs. Fed Chair Jerome Powell, however, emphasised that rates are “in the right place” given the many lingering uncertainties around tariffs and inflation, and he warned that it doesn’t feel like the end of the tightening cycle is here yet. In a rare turn, two Fed officials dissented in favor of an immediate rate cut – the first double dissent on a Fed decision in 30 years – reflecting a growing debate within the Fed about whether policy is now too restrictive. Even so, the majority agreed that more evidence is needed before any rate adjustments.

Across the Atlantic, the European Central Bank (ECB) paused its easing cycle. After a series of rate cuts over the past year to support growth, the ECB in late July kept its main rate unchanged at 2.0%. Policymakers signaled a wait-and-see stance, opting to monitor how Europe’s economy fares with the new U.S. trade tariffs before making further moves. Meanwhile, the Bank of England faces an opposite predicament: with UK inflation running hot and well above target, the BoE has little room to consider rate cuts. British policymakers have held rates at their highest level in over a decade and indicated that meaningful easing is off the table until inflation cools substantially.

For financial markets, these central bank decisions underscore that monetary policy will stay relatively tight for now. The Fed and others are prioritising the inflation fight and bracing for tariff-related impacts, even as growth slows. This has kept borrowing costs elevated but also reassured investors that central banks won’t prematurely loosen policy at the risk of reigniting inflation. Equity markets, in turn, have been buoyed by the stability and clarity in policy – July’s steady rate decisions and supportive remarks helped sustain risk appetite, especially as U.S. corporate earnings came in strong. Bond yields have drifted higher on expectations that rates will remain higher for longer, reflecting reduced odds of near-term cuts.

In Conclusion

July brought a mix of record market highs and persistent economic challenges.

Stocks are climbing a wall of worry, backed by trade détente and solid earnings, yet clouds linger in the form of sticky inflation, rising tariffs, and cooling growth. Central banks are walking a fine line, holding rates high to temper inflation without snuffing out the recovery. This has kept borrowing costs elevated but also reassured investors that central banks won’t prematurely loosen policy at the risk of reigniting inflation.

For investors, maintaining a diversified portfolio and disciplined strategy remains key to navigating these cross-currents. Given the politically and economically eventful nature of 2025, staying focused on long-term objectives – rather than short-term market noise – remains the wise course.

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