May Market Update: Sharp moves and narrow gains

Global Overview

April was a turbulent month in markets, with geopolitics - rather than economics - taking centre stage. At the heart of this volatility was former President Donald Trump’s “Liberation Day” tariff announcement, which triggered an immediate reaction across equity and bond markets. Although a subsequent 90-day delay to implementation helped to stabilise sentiment, uncertainty remains high. The episode reignited concerns about a potential global slowdown, with recession indicators flashing more clearly in some regions, even though underlying economic data continues to offer mixed signals.

United States: Shocks to the system

The U.S. was the epicentre of the policy shock. Trump’s tariff proposal, pitched as a fair and reciprocal adjustment to global trade imbalances, was underpinned by a simplistic formula that penalised countries with trade surpluses - particularly those with strong export links to the U.S., such as Vietnam. Markets were quick to react. Equities sold off and bond yields rose as investors priced in the risk of higher inflation and ongoing policy unpredictability. The volatility was enough to prompt a partial reversal from the White House, which introduced sector-specific exemptions and paused the broader rollout of tariffs for 90 days.

Despite the early weakness, U.S. equities staged a recovery by month-end. However, the rally was narrowly concentrated, driven by a small number of large-cap tech stocks and companies that were explicitly spared from the tariffs. Broader segments of the market - such as equal-weighted indices, mid-cap and small-cap stocks - lagged behind. In fact, the equal-weight S&P 500 ended April with a negative return, highlighting the disparity in performance. Meanwhile, the bond market, after an initial rise in yields, settled as fears eased slightly. Notably, the U.S. dollar weakened by 3% against the pound, an uncommon move during a period of market stress, which reflected growing investor discomfort with the direction of U.S. policy.

Economically, the picture was mixed. First-quarter GDP growth came in negative, influenced in part by businesses front-loading imports to beat the tariff deadline, which distorted trade data. Inflation readings were lower than expected, while employment figures remained robust - suggesting that, despite the noise, the underlying health of the U.S. economy has not yet deteriorated meaningfully.

United Kingdom: A Resilient Domestic Picture

In the UK, markets initially echoed the volatility seen elsewhere but managed a relatively stable finish. The FTSE 100 drifted slightly lower over the month, impacted by the global risk-off sentiment. In contrast, domestically focused stocks held up better, with the FTSE 250 rising nearly 3% in April. This outperformance was supported by firm corporate earnings and a degree of economic resilience at home.

Investor sentiment in the UK was also influenced by growing expectations that the Bank of England will continue to cut interest rates. The combination of global uncertainty and domestic economic steadiness appears to be nudging the Bank of England toward a more dovish stance. For investors, this created a constructive environment for interest-sensitive assets and underpinned equity valuations, particularly in sectors with more local exposure.

Europe: Capital Flows and Improving Sentiment

Europe emerged as one of the more favourable regions during April. While markets were initially caught up in the global equity sell-off, the narrative quickly shifted. The euro strengthened as international capital flowed out of the U.S., with European markets benefiting from growing expectations of fiscal expansion in Germany and renewed defence spending across the region. These shifts helped push European equities ahead of their U.S. counterparts on a year-to-date basis.

Earnings results across major European companies were generally resilient, which helped to reinforce investor confidence. In addition, inflationary concerns - particularly in services - began to ease. With that, markets started to price in a potential rate cut by the European Central Bank as early as June, creating further tailwinds for sentiment. Taken together, April was a month in which Europe benefitted both from external flows and improving internal dynamics.

Japan: Corporate Action and Diplomatic Efforts

Japan was a notable outlier in April, finishing the month with positive equity returns. This performance was supported by several factors. Firstly, Japanese negotiators were quick to engage with the U.S. administration, signalling a willingness to find common ground on trade issues. Although no firm agreements were announced, the early dialogue was enough to support investor sentiment.

In parallel, corporate Japan delivered a significant boost to markets through a wave of share buybacks - amounting to nearly £27 billion during the month, around three times the usual level. This shift toward more shareholder-friendly behaviour marks a meaningful cultural change and was well-received by investors. While Japan remains highly exposed to global trade and holds a significant surplus with the U.S., April demonstrated that proactive diplomacy and decisive corporate action can help insulate markets from external shocks.

Asia & Emerging Markets: Mixed Impact and Selective Recovery

Across Asia and emerging markets, the reaction to the tariff news was initially negative, with broad-based declines in early April. However, many markets stabilised and recovered as clarity emerged. The extent of the rebound varied, depending on the expected level of tariff exposure. Latin American markets led the way, benefiting from their relatively low direct trade exposure to the U.S.

Even in countries like Thailand, where trade dependency is high, markets rallied toward month-end as investors became more optimistic about the potential for negotiated outcomes. China, however, remains central to the story. China’s firm stance - including reciprocal tariff announcements - seemed to convince some market participants that the U.S. may walk back from the most extreme measures.

Outlook: Recession Watch and the Importance of Diversification

The 90-day tariff delay has bought markets some breathing room, but the fundamental issues remain unresolved. The risk of recession has undoubtedly increased, as tariffs act as a tax on both businesses and consumers while stifling global trade. The IMF has lowered its global growth forecasts in response, although it does not currently expect a full recession. Interestingly, U.S. growth projections remain stronger than those for most developed peers - underscoring the economic divergence still in play.

April highlighted the importance of portfolio diversification. While the U.S. dollar has historically been a safe haven in times of crisis, this time it weakened meaningfully, leading many investors to reconsider their currency and regional exposure. The fact that several international markets finished the month higher - despite the political noise - reinforces the argument for maintaining global balance within portfolios.

Final Thoughts

April delivered another reminder that markets can be as reactive to political headlines as they are to economic data. While short-term volatility may persist, particularly as the July tariff deadline approaches, long-term investors should remain focused on discipline and diversification. Many of the most important decisions - both political and economic - remain ahead, but staying broadly positioned across regions and asset classes continues to offer the best defence in uncertain times.