Market Commentary
May 2025 saw markets whipsaw as investors grappled with shifting trade dynamics, mixed economic signals, and evolving central bank policies. The month began with a sharp rally, extending April's gains, as the U.S. and China reached a 90-day trade truce. However, sentiment remained fragile amid concerns over the fiscal position and debt sustainability of the U.S. following a Moody's credit rating downgrade and the passage of an expansive fiscal stimulus bill.
Global equities showed divergent performance, with U.S. stocks flirting with bull market territory on hopes a trade truce could pave the way for a more comprehensive agreement, while Europe and Japan posted more modest gains. Bond yields retreated mid-month, with U.S. 10-year Treasury yields falling 11 basis points in one week, on growth worries but resumed their climb as focus shifted to rising deficits. Escalating geopolitical tensions, weak Chinese industrial output and retails sales data, along with mixed corporate earnings results added to the uncertain backdrop.
In Australia, the RBA cut rates by 25bps to 3.85% during the month and signalled its willingness to ease further if required. Governor Michele Bullock emphasised potential risks to economic stability that could be underestimated by markets. The case for additional rate cuts was bolstered by lackluster GDP growth forecasts, with some banks projecting a sharp slowdown to 0.2% in the quarter, and the looming threat of global trade headwinds. Despite these challenges, the Australian dollar demonstrated resilience, reaching a year-to-date high even as the U.S. dollar strengthened broadly.
Looking ahead, markets remain highly sensitive to trade developments as U.S. negotiations with key partners continue. Investors are closely watching economic data and central bank signals for guidance on growth and policy paths. While worst-case trade outcomes were avoided in May, uncertainty and the impact of tariffs will likely keep markets on edge in the near term
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