Insights

Living with Geopolitical Tension

Macro

The first half of 2025 was marked by numerous impactful events in the financial markets, from US Liberation Day to the approaching tariff deadline on July 9, which have resulted in heightened uncertainty in the markets. These have caused many economies globally to be affected and have seen revisions to their economic forecasts.

Most notably, in the Federal Reserve’s Federal Open Market Committee (FOMC) meeting on 18 June, the Fed is forecasting the US economy by end of 2025 to have a weaker median GDP growth of 1.4% down from 1.7%, higher inflation of 3% up from 2.8%, and lastly, unemployment rate to be 4.5% increased from 4.4% previously in March 2025. These forecasts are driven by President Trump’s policies, particularly those related to tariffs, immigration, and taxation. [1]  It is already experiencing some of these impacts with retail sales dropping more than expected to $715.4 billion (0.9% decline) in May, and more. [2]

In Europe, the global trade developments have been positive for its growth outlook with the eurozone economy expanding at a significantly faster pace than estimated in the first quarter of 2025, growing by 0.6%, doubling the earlier estimate of 0.3% and its strongest expansion since Q3 2022. This is because of the better-than-expected growth in Germany and strong output in Ireland, which has driven the growth of the Eurozone. The Eurozone has also successfully reigned in price pressures while ensuring resilient growth, with its CPI dropping to 1.9% in May from 2.2% in April, the first time it has fallen below the European Central Bank’s (ECB) 2% target since September 2024.[3] However, for the coming quarters, Eurozone is expected to experience a slowdown in growth as the impact of the trade war is felt.

Looking at Asia, the manufacturing activity across several Asian nations has weakened as the trade war uncertainty eroded demand, leading to a significant increase in goods surplus in these nations.[5] This has led to contraction in their economic activity, with Japan’s economy shrinking for the very first time in a year and at a faster pace, contracting 0.7% in January-March.[6] On the flip side, some Asian economies like Hong Kong have seen their economies expand, with their quarterly GDP expanding 3.1% from a year earlier due to an increase in exports and recovery of growth in overall investment expenditure.[7] In China, its economic outlook has seen signs of stabilization and some improvements with retail sales jumping 6.4% from a year earlier due to the fading drag from the property sector, strong government policy support to boost household consumption, and the manufacturing sector rapidly adopting new technologies which are supported by breakthroughs like DeepSeek which enhances efficiency and customisation.[8]

Equities

The equities market experienced elevated volatility in the first half of 2025 and is likely to remain elevated, and muted returns in the near term.[10] However, the equities market is starting to adapt to the geopolitical tensions and had also fully rebounded from Liberation Day with the S&P 500 logging its best May returns in more than 30 years and is now 1.5% below its all-time high driven by the strong performance of the Magnificent 7 except for Apple (AAPL).[11] Most notably, the nuclear energy sector is experiencing a resurgence unseen in decades, with companies like Oklo (OKLO) experiencing a more than a fivefold increase in their share price for the previous year.[12] Additionally, stablecoin companies, especially Circle, have an enormous surge in share price since IPO, with the GENIUS Act stablecoin bill that was passed by the Senate adding to the rise.[13]

For the European stock market, many investors have made a sharp pivot from the US to Europe, hoping for a European comeback driven by Germany’s fiscal stimulus and increased defence spending across Europe. The Europe Stock Market has outperformed the US Stock Market generating a return of 4.4% which is more than double of the US return in the past 3 months.[15]

Looking at Asia, it is also experiencing an influx of investments, with the MSCI All Country Asia ex Japan outperforming the S&P 500. The most notable market that has contributed to the performance is the Hong Kong Stock Market, generating a return of 18.20%. This was mainly led by three main themes: AI, Gen Z-focus consumer stock like Pop Mart, and Biotechnology, which are expected to continue to remain strong.

Fixed Income

Global fixed income markets are expected to be shaped by trade negotiations, geopolitical risks, sovereign fiscal policies, and central bank action in the second half of 2025. Additionally, the global yield curve steepening trend seen across major developed markets is also expected to continue.[18]

Looking at the U.S., the latest Fed meeting decision has left the federal funds rate unchanged at 4.25% – 4.50% again in June for the fourth consecutive meeting as they take a cautious stance to fully evaluate the economic impact from the recent events.[20] However, it is expected that the Fed will cut the rates at least once in 2025, which could signal a continued decrease in US short-term bond yields from the start of the year.[21]

In the broader fixed income asset classes, Investment Grade bond yields remained at compelling levels, which could provide broad risk aversion, especially with quality bonds from defensive sectors.[23]

FX

Overall in the FX markets, major currencies globally have significantly strengthened against the U.S. dollar in the past few months and it is expected to continue in the 2H 2025 as the Fed is expected to resume its interest rate cuts, while other G10 central banks are gradually concluding theirs. Additionally, a weaker consumer sentiment and concerns about the increase in U.S. fiscal debt also contribute to this weakening.[24]

However, despite all these concerns and recent talks about US losing its exceptionalism, It appears to still maintain its safe-haven status during geopolitical crisis. For example, during the Israel-Iran war, the greenback was seen strengthening against most of the other G10 and Asian currencies in the morning session after it struck Iran’s nuclear sites over the weekend with the ICE USD Index increasing 0.4%, USD/KRW increasing 0.7%, and more. [26]

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Source:

[1] United States Fed Funds Interest Rate – Trading Economics
[2] US Consumer Price Index edged lower than forecast in May – Times of Malta and US Retail Sales decline by 0.9% in May vs -0.7% expected – fxstreet.com
[3] Expect no more ECB rate cuts for now, says HSBC following inflation data | International Adviser and Eurozone Inflation Falls Below ECB Target in May – Trading Economics
[4] Asia Mid-year Outlook | J.P. Morgan Private Bank Asia
[5] Asia Mid-year Outlook | J.P. Morgan Private Bank Asia and Trade War Hits Asia Factories as Exports, Production Slide – Bloomberg
[6] Japan’s economy shrinks more than expected as US tariff hit looms | Reuters
[7] Hong Kong economy expands 3.1% in first quarter | Reuters
[8] Asia Mid-year Outlook | J.P. Morgan Private Bank Asia and China retail sales, industrial output, fixed asset investment in May – CNBC.com
[9] The ‘Magnificent 7’ are outperforming other stocks again — here’s why – Yahoo Finance
[10]  Our report on the economy for the rest of the year | Wells Fargo
[11] The ‘Magnificent 7’ are outperforming other stocks again — here’s why – Yahoo Finance
[12] CEG, OKLO, and SMR Get Set to Power the AI Boom via Nuclear Energy – Yahoo Finance
[13] GENIUS Act passes Senate  | Davis Polk
[14] Investors Have Been Fleeing US Stocks for Europe… | Morningstar
[15] Investors Have Been Fleeing US Stocks for Europe… | Morningstar
[16] TradingView — Track All Markets
[17] Fixed Income Outlook: Navigating cycles of uncertainty | Generali Investments | Reference Hub
[18] Fixed Income Outlook: Navigating cycles of uncertainty | Generali Investments | Reference Hub
[19] US2Y: 3.939% -0.002 (+0.0039%) – CNBC.com
[20] United States Fed Funds Interest Rate – Trading Economics
[21] Treasuries Hold Gains as Fed Rate-Cut Expectations Remain Intact – Bloomberg
[22] 2H 2025 Investment Outlook From Depths to Dawn – UOB Private Bank
[23] 2H 2025 Investment Outlook From Depths to Dawn – UOB Private Bank
[24] Dollar Strengthens After U.S. Strikes on Iran’s Nuclear Sites – Hindustan Times
[25] 2H 2025 Investment Outlook From Depths to Dawn – UOB Private Bank
[26] 2H 2025 Investment Outlook From Depths to Dawn – UOB Private Bank