It seems that the optimism of investors, as well as the resilience of consumers and businesses, were right for the impact of trade and wars.
The markets produced high yields in the first half of the year 2025. It seems that the optimism of investors, as well as the resilience of consumers and businesses, were right for the impact of trade wars and short wars. Sales of risky assets were quickly thwarted. Even implicit volatility measures have been reduced. Traders are now counting more strongly on multiple lowering of interest rates in the United States. The diatribes can be more brutal than reality, and this can bring investors assisting chaotic press conferences to think that it will not be very much with a consequence. Are they right? More than ever, concrete economic data will indicate the way to the markets during the second half, but do not be surprised if growth is lower and stronger inflation.
In decline – Global growth slows down. If we believe the historical data on GDP, and the forecasts formulated in prospects on the global economy, published by the International Monetary Fund, out of the 18 largest economies on the planet, in 2025, only India and Spain will present a growth rate higher than their annual average over 45 years. The rate composed of growth, compared to its long-term trend, suggests that in 2024, global growth has grown below its historical trajectory and that this year, this phenomenon will be even more pronounced. This does not mean that a recession awaits us. But that reflects a growing risk for such an event. In a historic overview, the “National Bureau of Economic Research” in the United States dated American recessions from the periods during which global growth had experienced a marked slowdown, that is to say, reaching a level lower than the average in the matter. We may be in one of these inflection points, and this clearly has implications in terms of asset allocation and investor positioning in the fixed income securities markets. The slowdown in growth should prolong the monetary relaxation cycle. In addition, the prospects for new rate reductions are much more obvious in the United States and the United Kingdom than in Europe.
The ball of new customs duties – However, the markets are not oriented according to a recession, and a large part of the analysis suggests that the world economy is resistant and capable of supporting the imposition of American customs tariffs of moderate magnitude. However, we do not know at what final level will be the new customs duties. According to a study by the investment bank that I read this week, the most likely result announced on July 9 will be a general customs right of 10%. The United States will then endeavor to conclude individual agreements with various countries and will retain a “negotiation position”, by threatening to impose increased prices if no agreement is concluded. At the end of the week, the feeling of the market seemed to reflect the impression that the United States and China were progressing on the path of a trade agreement. All this is a little laborious, to tell the truth. Why not have trade completely free from customs duties? Never before we have taken the risk of causing such economic damage to get such a thin gain.
Standby – We perceive some optimism as to the prospect that the American Federal Reserve (Fed) could be close to a lowering of its rates. Early consideration in market prices suggests the possibility of lowering the rates on July 30 – and a reasonable chance to obtain two more drops by the end of the year. For my part, I am not sure. Given the constant pressures exerted by the White House on the Fed so that it lowers its rates, the concrete economic data must justify such a decision. We do not go through a normal period and, although a lower rate based on lower growth forecasts can be justified, the credibility of the Fed is at stake. However, it may already be too late, because President Donald Trump said that he had four potential candidates in mind to replace the president of the Fed, Jerome Powell. Currently, however, the rates present only a low volatility, and the bond markets play their “safe shelter” role.
Slowdown (growth) but increase (technological values) – What do the figures say, by the way? The final figures on the growth of American GDP in the first quarter were published this week and reveal a contraction of 0.5%. We should not try to draw too much -reaching conclusions, taking into account the imports carried out to anticipate the customs duties announced and a certain slowdown in consumption expenses following a very good fourth quarter of 2024. But the trend is to slow down growth for most components of GDP. In annual shift, the economy increased by 2.0%, compared to 2.9% in the same quarter of the previous year. The quarter figures that just ended will be interesting, taking into account the volatility of trade, the drop in business and consumers ‘spending, as well as the effective impact of customs duties on consumers’ income and business margins. Growth at half mast clearly increases the risk of seeing the economy entering into recession. The question is whether it will be enough to shake the optimism of a stock market which is once again fed by the increase in technological shares. At a time when everyone is strengthening their expenditure on artificial intelligence, the course of NVIDIA action could continue to reach new heights, as was the case this week.
Highlight signs – The monthly reports of the Institute for Supply Management are still closely followed by the markets. In its survey on the manufacturing industry, this organization notes a clear decrease in the import index and a marked increase in the price index paid – as you would expect following the introduction of a tax on imported products. Weekly requests for unemployment benefits have also followed an upward trend, with an average over four weeks standing at 245,000 for the week ending on June 20, against 223,000 at the end of the first quarter. Nothing very dramatic, but sufficient to suggest that the United States is on a lower growth trajectory. Insufficient, however, to encourage the Fed to intervene. At least, not to do it immediately.
Credit is solid like a rock – A slowdown in growth, but in the absence of recession, is generally a context favorable to an allowance largely focused on fixed income securities. The trend is falling from interest rates – this is what I continue to predict. Even in Europe, where the euro has taken over vigor, the European Central Bank could estimate that inflation is closer to an too low level and therefore be forced to follow the path taken by the Swiss National Bank, by leading to rates close to zero. Even without such extreme intervention, the interest rate environment should be favorable to companies and investors who wish to maximize the income of their bond portfolio. Discussions that we have had this week with bond portfolio managers, it appears that the demand for credit remains very strong and that business credit problems, as well as high -performance bond markets, remain rare phenomena. The differences are tight, but the yields are attractive (5 % for first quality American titles and more than 7 % for high -efficiency titles).
Take the gains? – In the first half, market yields were much better than what could be planned given the trade war and the direct participation of the United States in military action against Iran. The yields of certain action groups are spectacular. The main Korean stock market index recorded a total increase of 29%, according to Bloomberg. Bond yields are modest, but they correspond to the return levels at the beginning of the year. The US high -performance market has released a total result of 4.3% in US dollars, and its total return index continues to reach historical heights. A gain of 7 to 8% throughout the year seems a probable thing.
The second half goes on a basis characterized by expensive markets and persistent risks. If I was placed in front of the choice either to secure gains, or to look for higher yields, I think I would know what I would do. It is indeed unnecessary to pretend the government in place in Washington would suddenly become more predictable and act more orthodox, or that the geopolitical risks had disappeared. The VIX index is 16, and the ICE Business Obligations index at one year or five offers a return of 4.5%.
