Monthly update: Markets rally on trade talk optimism

Global stock markets performed well in May, continuing the momentum gained at the end of April after US President Donald Trump paused most of the tariffs made on ‘Liberation Day’. Stock performances surged further following an agreement between the US and China to slash tariffs for at least 90 days, putting the brakes on the escalating trade war between the world’s two biggest economies.

An improving economic backdrop in the US also lifted investor sentiment. Inflation for the year to April was less than expected at 2.3%, down from 2.4% for the month prior. Additionally, jobs data exceeded expectations with 177,000 roles being created.

These announcements came in tandem with a solid earnings season, with a majority of companies beating estimates in the first quarter of the year. However, uncertainty surrounding the impact of US tariffs on businesses has clouded the outlook.

This side of the pond, European stocks also experienced significant gains, similarly bolstered by strong corporate earnings and renewed optimism on trade. The rally was further fuelled by Trump's decision to delay the implementation of a 50% tariff on imports from the European Union until 9 July.

Yields on long-term US government bonds rose (prices fell) after investors became more concerned about the growing fiscal deficit (the difference between government revenue and spending) and the financial impact of Trump’s proposed tax cuts. Trump’s proposal would extend many of the tax cuts made during his first term and is forecast to add $4 trillion to US debt over the next decade.

Lilian Chovin, Head of Asset Allocation at Coutts, says: “Provided economic growth remains robust, markets are usually able to digest higher yields. Also, while US long term yields (30 years +) have risen in recent weeks, US 10-year yields have come down and remain lower than where they were earlier this year.

“What we are noticing now is that investors’ attention is shifting away from tariffs toward the potential impact Trump’s proposed tax plans could have on debt levels.”

Meanwhile, Japan’s long-term bond yields climbed to record levels due to falling demand and global market concerns over rising debt. The Bank of Japan (BoJ) has been in a rising interest rate cycle since March last year which has contributed to the pressure on Japanese government bond (JGB) prices.

JGB yields have also started edging lower as demand has stabilised and concerns over rapid policy tightening have eased.

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. You should continue to hold cash for your short-term needs.

Global markets continue to perform well and have recovered to their pre-Liberation Day levels. However, uncertainty persists given the nature of the White House’s trade policies which has resulted in increased risks. As a result, our investment process has guided us to reduce our overweight allocation to global equities.

Lilian explains: “Although market sentiment has improved since early April, we could see some impact from the rise in uncertainty onto US economic growth and corporates earnings. Until there is greater clarity on some of President Trump’s policies, it is prudent to reduce the risk within portfolios.

“With that said, the business cycle and earnings outlook remain positive, supporting our view to maintain an overweight position in global equities, albeit reduced.”

Using the profits taken from reducing our equities exposure, we have increased our allocation to JGBs. In the wake of a prolonged period of deflation and negative interest rates, the BoJ is starting to normalise interest rates.

This has resulted in a sell-off in longer-dated JGBs which offer attractive yields – the highest they’ve been in over 20 years. Therefore, the possibility of future returns has increased as any decline in JGB yields would mean prices rise.

Furthermore, the dollar has been weakening, which means global equities are not performing as well once converted into sterling. Our portfolios have helped cushion this by hedging some of our global equity allocation in sterling.

Because bonds and equities have been more correlated than is typical, we remain invested in a liquid alternatives fund to help improve diversification in our multi-asset portfolios. An advantage of the fund is that it tends to perform independently of broader equity and bond markets.