Overview
In May 2025, global financial markets experienced heightened volatility driven by a combination of macroeconomic headwinds, escalating tariffs, and intensifying geopolitical tensions. Persistent inflationary pressures and mixed economic data from major economies like the US, China, and the EU fueled uncertainty around central bank policy directions. The reintroduction and expansion of tariffs, particularly between the US and China, sparked fears of a renewed trade war, weighing on global trade and manufacturing stocks. Geopolitical developments, including unrest in the Middle East and strained US-EU relations, further rattled investor sentiment. These factors collectively triggered capital outflows from risk assets and increased demand for safe havens like gold and U.S. Treasuries.
Towards the mid of May, the United States and China agreed to a 90-day pause on tariffs on May 12, 2025, during trade negotiations held in Geneva. As part of this truce, both nations committed to significantly reducing their tariff rates—the US lowered its tariffs from 145% to 30%, and China reduced its tariffs from 125% to 10%, effective by May 14. The agreement aimed to de-escalate the ongoing trade tensions and provide a window for further negotiations on broader economic issues. Financial markets embraced this development with equity markets delivering best performance in May since 2021. However, markets remained on edge as investors braced for potential economic and policy shifts in the months ahead.
Looking at the performance of major asset classes in May 2025, in response to positive developments on tariffs fronts, investors responded by taking exposures to risk assets, resulting in one of the best months for equity markets over the last 5 years. Both The S&P 500 index and DJ Islamic markets index returned 5.6%, respectively. In Europe, after experiencing an increased volatility, stock markets were buoyed later in the month by optimism over potential US-China trade talks, with indices like the FTSE 100 and Euronext 100 ended the month with healthy returns of 3.8% and 4.3%, respectively. In Asia, China’s Shanghai index increased 2.2% while Japan’s Nikkei index gained 4.15% in May. On the fixed income side, DJ sukuk index ended the month flat as yields remained volatile and range bound in the month. Additionally, the U.S. dollar further weakened, where GBP appreciated 1.35% against USD, and gold prices saw further gains (+1.6%) as market participants sought stability amid the uncertainty. However, DJ commodity index appreciated only 0.6% amid little movement in crude oil prices (+1.2%). Despite the recovery, markets remained cautious amid ongoing geopolitical tensions and concerns over high valuations, particularly in the US, where equities were considered vulnerable to growth disappointments. The following snapshot provides a detailed breakdown of the performance of different asset classes in May 2025 and year-to-date.
Market Snapshot
News & Key Events in May
UK
• The annual inflation rate in the United Kingdom surged unexpectedly to 3.5% in April 2025, its highest level since January 2024. This marked a significant increase from the 2.6% reported in March and surpassed market predictions of 3.3%. The primary driver behind this sharp rise was the substantial hike in housing and utility prices, which soared by 7.8%, compared to just 1.8% previously. Within this sector, electricity prices rebounded to a growth of 4.6%, in contrast to the previous month’s decline of -8.8%, while gas prices experienced a remarkable increase of 12.2%, recovering from a steep fall of -12%. These changes were largely attributed to the new energy price cap introduced by Ofgem in April 2025, which reshaped the pricing dynamics in the energy market.
• In May, the Bank of England’s Monetary Policy Committee made a narrowly split decision to cut Bank Rate by 25 basis points to 4.25%. This move aligns with market expectations, but the vote highlighted diverging opinions among policymakers. While five members supported the modest reduction, two advocated for a more aggressive cut to 4%, and two others preferred maintaining the rate at 4.5%, reflecting ongoing debates about balancing inflation control with economic growth.
• The British economy, meanwhile, displayed robust performance in the first quarter of 2025, expanding by 0.7% compared to the previous quarter, a notable improvement from the 0.1% growth rate seen in Q4 2024. This latest figure also exceeded forecasts of a 0.6% rise, marking the strongest quarterly growth in three quarters and indicating resilience amid inflationary pressures.
• However, labour market data painted a less optimistic picture. The unemployment rate in the UK edged higher to 4.5% in the January-to-March period of 2025, breaking a streak of four consecutive periods at 4.4%. This increase matched market expectations but could signal underlying challenges in maintaining employment stability amidst evolving economic conditions.
US
• Across the Atlantic, the United States experienced a contrasting inflationary trend, with the annual inflation rate easing to 2.3% in April 2025. This represented the lowest inflation print since February 2021 and a slight drop from the 2.4% recorded in March, falling below market forecasts of 2.4%.
• During the May Federal Open Market Committee (FOMC) meeting, minutes revealed heightened concerns among policymakers regarding the impact of recently announced tariff increases. These tariffs were described as significantly larger and more widespread than anticipated, contributing to considerable uncertainty surrounding trade policy. Officials expressed worries about the unpredictable nature of the tariffs’ magnitude, scope, timing, and duration, which they judged to have increased downside risks to employment and economic activity while simultaneously elevating upside risks to inflation.
• Economic growth data for the United States painted a sombre picture, with the economy contracting at an annualized rate of 0.2% in the first quarter of 2025. Though this represented a slight improvement from the initial estimate of a 0.3% decline, it marked the first quarterly GDP contraction in three years, highlighting vulnerabilities in the U.S. economy amid global and domestic challenges.
• Consumer sentiment, as measured by the University of Michigan, saw a sharp upward revision in May 2025, with the index reaching 52.2 from an earlier preliminary figure of 50.8. This adjusted figure matched the sentiment level for April, but the current index continues to hover at the low levels last observed in 2022, reflecting lingering concerns among consumers about the economic outlook.
Europe
• Eurozone consumer price inflation saw a significant easing, with the year-on-year rate falling to 1.9% in May 2025 from 2.2% in April. This decline surpassed market forecasts of 2.0%, marking the first instance of inflation dropping below the European Central Bank’s (ECB) 2.0% target since September 2024. Economists perceive this development as a pivotal moment that strengthens the likelihood of the ECB announcing a 25 basis point rate cut later this week. Furthermore, discussions among analysts hint at the possibility of additional rate reductions in the near future, reflecting the central bank’s commitment to achieving sustainable price stability.
• This inflationary trend has unfolded against a backdrop of geopolitical and economic complexities, including trade disputes and U.S. tariff policies. Minutes from the ECB’s April 16–17 meeting reveal growing concerns about the interplay between these factors and their impact on European markets. While recent trade tensions and the introduction of U.S. tariffs are anticipated to exert downward pressure on economic growth, ECB officials remain optimistic about their ability to mitigate inflationary risks. They foresee disinflationary forces prevailing in the short term, even as the protracted nature of the trade disputes creates uncertainties for long-term price stability.
• Meanwhile, the Eurozone economy demonstrated resilience, recording a growth rate of 0.3% in the first quarter of 2025. Although slightly below the preliminary estimate of 0.4%, this expansion represents the fifth consecutive quarter of positive growth. The region’s economic performance was bolstered by stronger domestic demand, which benefited from easing inflationary pressures, reduced borrowing costs, and renewed fiscal optimism stemming from Germany’s relaxation of fiscal constraints. Additionally, the promise of increased defense spending in the coming months contributed positively to sentiment, counterbalancing concerns over the potential impact of U.S. trade duties. However, the outlook for the Eurozone remains cautious, as businesses and consumers adapt to rising uncertainties, which may dampen investment and consumption in the months ahead.
• In political developments, Poland witnessed a surprising shift in leadership with the nationalist opposition candidate, Karol Nawrocki, narrowly emerging victorious in the presidential election. Securing 50.89% of the vote, Nawrocki’s win delivers a blow to the centrist government and challenges Warsaw’s established pro-European stance. This outcome reflects a growing trend among European conservatives, drawing parallels with the populist movements inspired by figures like Donald Trump in the United States.
China
• China’s economic trajectory in April 2025 revealed a complex interplay of deflationary pressures and policy interventions. Consumer prices declined by 0.1% year-on-year, maintaining the same pace as March and aligning with market expectations. This marks the third consecutive month of deflation in consumer prices, driven by weak domestic demand, escalating trade tensions with the U.S., and persistent uncertainties in employment.
• In response to these challenges, the People’s Bank of China (PBoC) adopted aggressive monetary easing measures during its May policy meeting, cutting key lending rates to unprecedented lows. This marked the first rate reduction since October and was consistent with market predictions. The one-year loan prime rate (LPR), the primary benchmark for corporate and household loans, was reduced by 10 basis points to 3.0%. Similarly, the five-year LPR, which influences mortgage rates, saw a parallel cut to 3.5%. These adjustments demonstrate Beijing’s strategic approach to cushioning the economy amidst global and domestic challenges.
• China’s GDP experienced modest growth, expanding by a seasonally adjusted 1.2% in the first quarter of 2025. This figure reflects a deceleration from the previous quarter’s 1.6% rise and falls below market consensus of 1.4%. Nonetheless, this marks the 11th consecutive quarter of economic growth, underscoring China’s ability to sustain progress even in the face of headwinds. Despite this, the slower pace of expansion highlights vulnerabilities within the economy that require careful navigation.
• On a positive note, the country’s employment data registered an improvement, with the surveyed unemployment rate decreasing to 5.1% in April 2025 from 5.2% in March. This represents the lowest unemployment figure since December 2024, indicating some recovery in labour market conditions amidst broader economic uncertainties.
Others
• Japan’s annual inflation rate was 3.6% in April 2025, unchanged from March and at its lowest level since December.
• The Bank of Japan (BOJ) kept its key short-term interest rate unchanged at 0.5% during its May meeting, maintaining the highest level since 2008 and aligning with market expectations.
• The annual inflation rate in Canada decreased to 1.7% in April 2025 from 2.3% in the previous month, slightly above market expectations of 1.6%, but still showing the smallest increase in consumer prices in seven months.
• The annual inflation rate in Russia eased to 10.2% in April 2025 from the two-year high of 10.3% observed in the previous month, ending five consecutive increases.
• Bitcoin’s value increased in May, closing the month at $105,000 per token, consistent with a broader rally in risk markets. However, it remains below its highest price level of $108,786 reached in January 2025.
Disclaimer
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