In Q2 2025, global economies and financial markets were shaped by a complex mix of macroeconomic forces, including slowing growth, higher or sticky inflation, and shifting monetary policy expectations. While inflation remained high across advanced economies, lingering tariff pressures and geopolitical risks, especially in the Middle East, kept uncertainty elevated. Central banks like the Fed paused rate cuts while the Bank of England delivered only one cut amid mixed signals, further unsettling markets. The U.S. economy showed signs of deceleration, China’s recovery lost momentum, and Europe struggledwith weak investment and trade headwinds. Despite these challenges, equity markets rebounded on the back of strong tech earnings and hopes for future stimulus, while bond yields eased as investors priced in slower global growth. Investors’ appetite for risk assets improved as both equities and Bitcoin delivered strong performances in the second quarter.
Macroeconomic picture
In the second quarter of 2025, the macroeconomic environment across major economies became increasingly intricate, shaped by the interplay of evolving trade policies, inflationary dynamics, and sustained geopolitical tensions. In the United States, the economic outlook was constrained by the continuation and expansion of the tariff regime under President Donald Trump. The introduction of a minimum 10% tariff on most imported goods, coupled with the prospect of further increases, generated considerable uncertainty for businesses and consumers alike. This uncertainty was further aggravated by inflationary pressures associated with elevated import costs, which Federal Reserve Chair Powell identified as a principal factor delaying prospective interest rate reductions. As a result, yields on 10-year U.S. Treasury securities remained elevated for much of the quarter, as investors weighed the risks of entrenched inflation against the likelihood of future monetary easing.
In contrast, the macroeconomic outlook in Europe was notably more stable and predictable. The region benefited from a convergence of declining inflation, robust employment, and renewed fiscal measures aimed at stimulating growth. Major economies, including Germany, introduced substantial stimulus packages, while Ireland surpassed expectations and the eurozone as a whole increased defence spending in response to mounting geopolitical risks. These efforts supported the euro, which appreciated against major currencies and contributed to the moderation of inflation, even as global commodity prices softened. The European Central Bank’s policy stance remained aligned with these disinflationary trends, enhancing overall economic sentiment throughout the continent.
The United Kingdom, meanwhile, experienced a more nuanced macroeconomic environment. Economic activity demonstrated improvement, prompting the Bank of England (BoE) to indicate a shift toward a more accommodative monetary policy, notwithstanding persistent inflationary pressures. Although consumer prices remained elevated, the labour market softened, with rising unemployment and weakening job growth fostering expectations of potential BoE rate reductions as early as August 2025. Both businesses and households balanced cautious optimism about possible monetary easing with continuing concerns regarding the underlying health of the economy.
In Asia, China’s economic momentum, while still present, moderated in the face of increasing challenges. Growth expectations were revised downward as key indicators, including industrial output, retail sales, and fixed investment, slowed, largely as a result of U.S.-imposed tariffs and the consequent disruptions to supply chains. The Chinese government, contending with persistent structural issues such as sustained weakness in the housing market and rising unemployment, opted for a prudent approach, refraining from broad-based fiscal stimulus and instead favouring targeted measures to support stability. The broader impact of global trade tensions, particularly those involving the United States, continued to complicate China’s economic outlook, underscoring the interconnected and evolving risks defining the global economic landscape in 2025.
The following table lists the latest key macroeconomic indicators across major economies.
Update on ‘Trump tariffs’: In recent weeks, President Trump has moved from negotiating to issuing official tariff notices, with implementation scheduled for August 1 following the expiration of his July 9 negotiation deadline. These notices, delivered as “letters,” inform trading partners, particularly the 18 countries accounting for 95% of the U.S. trade deficit, of impending tariff hikes unless reciprocal trade deals are reached. The new tariffs will follow a baseline of 10%, escalating to as high as 70% for some goods, significantly higher than earlier peaks around 50–60%. Nations perceived as adopting “anti‑American” or aligning with BRICS countries risk an additional 10% penalty tariff.
While limited bilateral agreements have been struck with countries like the UK and Vietnam, larger economies including the EU, India, Japan, and South Korea are racing to negotiate to avoid steep tariffs. Meanwhile, unresolved issues persist with Canada and Mexico, notably causing Canada to threaten retaliatory tariffs after U.S. steel and aluminium duties doubled to 50% in June. Legally, a federal court in late May voided Trump’s blanket “Liberation Day” tariffs under IEEPA, though the administration is appealing, making their enforcement temporarily suspended. Despite these legal battles, the broad tariff regime remains largely intact under different statutory authorities.
Financial markets performance
Looking at the performance of major asset classes in Q2 2025 (April 1–June 30), global financial markets rallied strongly across most asset classes, reversing Q1’s COVID-style crash provoked by tariffs escalation. U.S. equities surged with the S&P 500 climbing about +10.5% while DJ Islamic Markets Index surged 11.1%, propelled by resumed tariffs’ talks, resilient corporate earnings, and strong AI sector performance. International equities also outperformed, Japanese Nikkei 225 index rose roughly +13.7% and China’s Shanghai delivered +2.9%. European stocks ended the quarter flat while UK FTSE 100 rose 2.57% (European stocks delivered over 10% in USD terms all supported by a weakening dollar). GBP appreciated 6.26% against USD. Fixed-income markets were positive too, where DJ Sukuk Index returned 1.64% as yields drifted lower following easing inflation data and central bank restraint. In contrast, broad commodities underperformed, dipping about 2.62%, weighed down by falling oil prices (down 10.5%) despite mid-June geopolitical tensions. Finally, gold and crypto-linked sectors outperformed traditional commodities, driven by safe-haven demand and strong crypto legislation momentum and broadening adoption of digital assets.
Performance of Global Assets Q2 2025
US Treasury Yields
In the second quarter of 2025, U.S. 10‑year Treasury yields overall declined by around 30–35 basis points, sliding from approximately 4.55 % in early April to roughly 4.20–4.30 % by late June, before settling near 4.30 % as June closed. The retreat was largely driven by cooling inflation expectations, as tariff pressure eased and geopolitical tensions briefly subsided, particularly following the temporary Israel‑Iran ceasefire, which helped oil prices stabilize. Additionally, the Federal Reserve held rates steady, and softer economic data, including signs of weakening U.S. labour and consumer activity, reinforced bets on upcoming rate cuts, pushing yields lower. Despite modest volatility, the decline marked the strongest half‑year trend in Treasury yields since 2020, as bond markets adjusted to a recalibrated macroeconomic outlook.
10-Year Treasury Yields
Bitcoin performance
In Q2 2025, Bitcoin delivered a robust performance, marking approximately a 30% increase, closing June at record highs above $107,000, primarily driven by surging institutional demand and growing ETF adoption. The price rallied from around $83,000 at the start of April to surpass $110,000 in mid‑May, buoyed by strong inflows into spot Bitcoin ETFs totalling several billion dollars. Analysts noted a shift in Bitcoin’s role from speculative asset to “digital gold,” citing its safe-haven appeal amid macroeconomic and geopolitical headwinds. Technical momentum remained strong, with some forecasting further upside toward $143,000 if key resistance levels are breached. Overall, Q2 underscored Bitcoin’s transition into mainstream finance, supported by regulatory clarity and broader adoption.
Geopolitical situation
In mid‑June 2025, Israel escalated its long-standing strategic rivalry with Iran into open conflict, launching surprise airstrikes and covert drone operations across Iranian territory. On June 13, Israel conducted targeted strikes on Iran’s nuclear facilities and senior IRGC commanders inside Tehran and other sites. Iran retaliated with dozens of ballistic missiles and drones aimed at Israel and U.S. interests in the region, including a notable strike on Al‑Udeid Air Base in Qatar on June 23, signalling a dangerous regional escalation. After roughly 12 days of intense exchanges, a tentative ceasefire was announced around June 24, though analysts warned that “the war remains an unfinished project, for both sides”.
Meanwhile, the prolonged Gaza war between Israel and Hamas carried on through Q2 2025, despite intermittent ceasefire efforts. Hostage negotiations and UN-backed truce proposals, including a U.S.-brokered plan for a 60‑day ceasefire tied to staged hostage and prisoner exchanges, gained momentum in June. Israeli strikes across Gaza persisted, resulting in ongoing civilian casualties and humanitarian strain, even as Hamas signalled conditional acceptance of the framework. With world leaders and U.S. mediators pushing for progress, the conflict remained volatile, with prospects for a durable peace still uncertain.
Key News & Events in Q2 2025
UK
• The annual inflation rate in the United Kingdom moderated slightly to 3.4% in May 2025, down from 3.5% in April, in line with market expectations. This figure remains significantly higher than the 2.6% rate recorded at the end of the first quarter. The persistent elevation in consumer prices is attributed to ongoing increases in food and energy costs, as well as rising housing expenses. Although inflation has eased marginally from the previous month, it continues to exceed the Bank of England’s target of 2%, keeping both households and policymakers vigilant regarding future price developments.
• At its June meeting, the Bank of England’s Monetary Policy Committee voted by a margin of 6–3 to maintain the Bank Rate at 4.25%. This decision reflects a prudent approach in light of continued global uncertainty and persistent inflationary pressures. Three committee members advocated for a reduction of the rate by 0.25 percentage points to 4%, illustrating divergent perspectives on inflation risks and economic growth. Market participants had anticipated a 7–2 split, and the actual vote resulted in some short-term currency volatility. The Bank implemented a single rate cut in the second quarter, decreasing the rate from 4.50% at the end of Q1 to 4.25% in May, in response to indications of a potential economic slowdown.
• The United Kingdom’s economy expanded by 0.7% on a quarter-on-quarter basis in the first quarter of 2025, consistent with the preliminary estimate and representing the strongest performance in a year. Growth was driven primarily by the services sector, which benefited from robust consumer spending and a recovery in hospitality and tourism following an unseasonably mild winter. Additionally, the manufacturing and construction sectors contributed positively, supported by increased government investment and deferred demand from previous quarters.
• The UK Spending Review 2025, presented by Chancellor Rachel Reeves in June, established the government’s funding priorities for the forthcoming years. Adopting a zero-based budgeting methodology, each departmental programme must justify its expenditure, with the aim of eliminating inefficiencies and redirecting resources toward critical national priorities. The review places particular emphasis on reinforcing the National Health Service, enhancing defence capabilities in the context of heightened global tensions, investing in clean energy infrastructure, improving educational quality and accessibility, and expanding affordable housing. Despite stringent fiscal constraints, the government’s strategy is designed to foster long-term growth and modernise public services, underscoring a commitment to responsible investment and economic resilience.
US
• In the United States, the annual inflation rate increased for the first time in four months, reaching 2.4% in May 2025, compared to 2.3% in April. This marks the lowest inflation rate since 2021, although it did not meet the market consensus of 2.5%. The sustained moderation in inflation is attributable to declining used car prices and a slower pace of rental growth, partially offset by increases in medical care and food costs. At the beginning of the second quarter, inflation remained at a comparable level, signalling a period of relative price stability.
• The United States Federal Reserve maintained the federal funds rate in the range of 4.25% to 4.50% for the fourth consecutive meeting in June 2025. Policymakers adopted a cautious stance, opting to hold interest rates steady while evaluating the broader implications of recent fiscal policies, including trade tariffs, immigration reform, and potential tax adjustments. This approach reflects lingering concerns regarding the resilience of consumer demand, global economic uncertainties, and the unpredictable consequences of evolving economic policies.
• The US economy contracted at an annualised rate of 0.5% in the first quarter of 2025, a more pronounced decline than previously estimated. This contraction, the first in three years, is primarily attributed to a significant reduction in business investment, subdued consumer spending, and weaker exports brought about by increasing tariffs and sustained global uncertainty. The contraction in gross domestic product has prompted ongoing debate among economists regarding the potential for a broader economic slowdown or recession should these trends persist.
• Notwithstanding these economic challenges, consumer sentiment in the United States demonstrated improvement. The University of Michigan’s consumer sentiment index for June 2025 was revised upward to 60.7 from a preliminary reading of 60.5, and notably higher than the 52.2 recorded in May. The improvement in sentiment was broad-based, with consumers expressing increased confidence in both personal finances and business conditions. Expectations for the forthcoming year improved by 20% or more across several indicators, indicating optimism for a potential recovery as policy directions become clearer.
Europe
• Within Europe, the inflation rate in the Eurozone increased modestly to 2.0% year-on-year in June 2025, up from the eight-month low of 1.9% in May. This slight rise was primarily driven by higher service costs and fresh food prices, partially counteracted by declines in energy prices. At the outset of the second quarter, the inflation rate stood at 2.2%, suggesting a stabilising price environment as the European Central Bank (ECB) continues its programme of monetary easing.
• At its most recent meeting, the ECB implemented an eighth consecutive interest rate reduction, lowering the deposit rate to 2.15% from 2.65% at the end of the first quarter. Minutes from the policy meeting held from June 3 to 5 indicate a strong focus on safeguarding inflation expectations and preventing unwarranted tightening in financial conditions. These ongoing measures are designed to support lending activity, stimulate investment, and encourage economic expansion, particularly as several member states continue to recover from last year’s economic disruptions.
• The Eurozone’s economy expanded by 0.6% in the first quarter of 2025, double the previous estimate of 0.3%, representing its strongest quarterly growth since the third quarter of 2022. This robust performance was bolstered by Ireland’s remarkable 9.7% increase in gross domestic product, primarily due to a rebound in pharmaceutical exports, alongside an improved performance from Germany’s industrial sector. Analysts generally attribute the region’s growth to supportive policy measures and a revival in global demand.
China
• In China, consumer prices continued to decline, decreasing by 0.1% year-on-year in May 2025 for the fourth consecutive month, as the country continues to contend with subdued consumer demand, protracted trade tensions with the United States, and ongoing uncertainties regarding employment stability. The modest rate of deflation, marginally less severe than the anticipated 0.2% decrease, suggests that downward pressures on prices remain particularly pronounced in the discretionary goods and services sectors.
• The People’s Bank of China (PBoC) maintained the key lending rate at a historic low of 3% during the June fixing, subsequent to a 10 basis point reduction from the 3.1% level observed in the first quarter. This measure, accompanied by recent deposit rate cuts by major state-owned banks, reflects the authorities’ continued efforts to support economic activity in the face of additional tariffs imposed by the United States and to stimulate domestic demand. By maintaining low borrowing costs, the PBoC aims to incentivise both business investment and household expenditure, thereby mitigating the impact of external economic headwinds.
• China’s gross domestic product grew by a seasonally adjusted 1.2% quarter-on-quarter in the first quarter of 2025, slowing from a 1.6% increase in the final quarter of 2024 and falling short of the consensus forecast of 1.4%. The deceleration is attributed to weaker manufacturing output, persistent challenges in the property market, and consumer caution amid ongoing economic uncertainty. In light of these trends, policymakers are expected to consider the implementation of further economic stimulus measures to support growth in the forthcoming quarters.
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