At The Halfway Mark Of 2025

WHERE WE STAND – 2025 is halfway done.

In the first six months of the year, we’ve had – President Trump returning to the Oval Office; sweeping tariffs being imposed, then (temporarily) removed, on US imports; conflicts between India and Pakistan, Israel and Iran, plus continuing war in Ukraine; AI advancements continuing apace, including the emergence of DeepSeek in China; elections in Germany, Canada and Australia, among others; rate cuts continuing across much of G10, barring the FOMC and BoJ; plus, plenty else besides.

Amid all that, stocks have been choppy, but ultimately traded well – the S&P is up over 5% on the year, sitting at record highs, while Germany’s DAX sits 20% higher, though the Hang Seng leads the way having rallied almost 25% YTD (all in local currency terms). Meanwhile, the dollar has slumped against all major peers, with the EUR and CHF the main beneficiaries of this weakness, gaining well over 10% apiece, as the buck has its worst start to a year since the early-70s. Treasuries, despite a wobble around ‘Liberation Day’ have rallied on the year, with benchmark 2-year yields slipping about 50bp, and benchmark 10-year yields falling around 25bp, in turn seeing the curve steepen to the most since early-2022. Gold, though, has been the standout performer, rallying almost 30% since the start of the year, even if some wind has come out of the yellow metal’s sails of late.

So, what comes next?

Sadly, I was never blessed with psychic talents, nor do I have a crystal ball handy. Plus, given the deluge of events seen already this year, making high conviction calls is folly, at best.

Still, some themes to bear in mind include – a resolution, at least of sorts, on trade, even if this is simply a further postponement of US tariffs as negotiations continue; what impact those tariffs will have on inflation, and on growth, in the US and across the globe; on the Fed, both who the next Chair will be, and when the next cut will be made, with my base case still favouring December on that latter point; further fiscal tightening in the UK, as Chancellor Reeves again hikes taxes to ‘balance the books’ and meet her fiscal rules, even if her tenure appears to be on borrowed time; plus, a continued focus on geopolitical developments, as well as other potential ‘black swan’ events.

As for markets, my base case is that the path of least resistance will continue to lead to the upside for equities across the board, though European outperformance should continue, with defence leading the way from a sectoral perspective. The bull case remains one of calmer rhetoric on trade, coupled with strong earnings growth, and solid underlying economic growth. For now, all three of those factors look set to persist, though a re-assessment would be required if the backdrop shifts.

Elsewhere, Treasuries for the time being are set to remain rangebound, with fiscal concerns netting off against growth jitters to, essentially, create relatively tight trading bands. The longer-run trajectory, though, continues to hinge on how President Trump treats the issue of monetary policy independence, with further moves to erode the Fed’s standing likely to only further encourage steepeners.

In FX, the greenback’s steady decline looks set to continue, as the idea of ‘US exceptionalism’ continues to wane, and international investors continue to shift capital out of the States in reaction to ongoing policy uncertainty, and incoherence. The EUR, in the G10 world, looks likely to benefit most here, especially with the ECB having tacitly endorsed further appreciation, though I’d imagine they grow more uncomfortable if we get closer to $1.20. Gold also stands to benefit on this front, even if the rally has fizzled out a bit of late.

What have all these market views got in common? In short, it’s the TACO trade!

Trump’s tendency to U-turn on almost everything has been the main narrative through H1, and probably will be again in H2. In fact, the only thing Trump seems unlikely to U-turn on is the very fact that he always pulls a U-turn.

LOOK AHEAD – July, and H2, get underway with a relatively busy data docket.

The usual early-month plethora of PMI figures are due, with manufacturing surveys out from most major economies. Most attention will centre on the latest US ISM figure, seen holding roughly steady at 48.7, from a prior 48.5.

Elsewhere, last month’s eurozone inflation figures drop, with headline prices set to hover once more around the ECB’s 2% price target, probably cementing the idea that the ECB will stand pat later this month. US JOLTS job openings data is also due, though the figures reference May, hence are somewhat stale.

Speaking of the ECB, we’re due to hear from President Lagarde today, who appears on a panel of central banking ‘big beasts’ including Fed Chair Powell, BoE Governor Bailey, and BoJ Governor Ueda. All four of those, though, are highly likely to stick to their recent scripts, with Powell, in particular, highly unlikely to deviate from a now-familiar ‘wait and see’ approach.