Monthly report

CIO Report - July 2025

Markets

Global equity markets continued to perform well in July, particularly in the US, China and Japan. Some stock markets in emerging markets, such as India and Brazil, struggled to keep pace with the global trend due to uncertainties surrounding US tariff policy. The main drivers for these generally very favourable markets continued to be a sharp rise in global liquidity, which more than compensated for geopolitical and trade policy uncertainties and a cooling economy. This increase in liquidity was partly a result of massive issuance of T-bills by the US Treasury to finance the government deficit. T-bills are money-like instruments and increase liquidity in the financial system. Accordingly, corporate bond markets also reacted positively, with credit spreads falling accordingly. In contrast, however, there was a slight rise in yields on longer-term government bonds in the US, but also in Europe. Persistent inflation in the US, rising government debt and the still solid US economy despite the slowdown were important drivers here. In Europe, too, a recession was narrowly avoided in the second quarter. Due to an improvement in the US trade balance induced by tariff policy, the US dollar performed strongly, which interestingly runs counter to the plans of the Trump administration. The aforementioned combination of a still solid economy, persistent inflation and high liquidity also led to rising commodity prices, especially for oil and, temporarily, copper. The latter came under significant pressure again towards the end of the month due to US tariff policy.

Outlook

The surge in liquidity since the start of the year has supported a sharp rebound in global equity markets since “Liberation Day” in early April. With the suspension of the US debt ceiling, one positive liquidity factor is disappearing as the US Treasury is expected to replenish its Treasury General Account at the Fed by around USD 500 billion by the end of September – directly draining reserves from the banking system and tightening liquidity conditions. Globally, however, positive factors still dominate: The People’s Bank of China has expanded the money supply by around USD 1.5 trillion over the past six months. In addition, the US Treasury is increasingly issuing short-dated T-bills, considered near-money instruments, thereby boosting liquidity. Around 60% of global central banks remain in easing cycles, which continue to support risk assets. The US labour market has clearly lost momentum. Job growth is concentrated in a few sectors such as healthcare and education. Future Fed rate decisions will hinge on the unemployment rate – which will depend on whether the decline in labour demand outweighs the shrinking labour supply (partly due to restrictive immigration policy). Leading indicators point to increasing difficulty in finding employment – a further rise in unemployment seems likely. US inflation is expected to pick up further in the coming months. Surveys show that firms are largely passing on higher import prices to consumers – reinforcing inflationary pressures. The Fed thus faces a policy dilemma, but it should prioritise its employment mandate: While labour market pressures are likely to prove structural – with businesses requiring years to adjust to the new tariff regime – the inflationary impact of tariffs should be transitory. Moreover, falling real incomes and weaker economic momentum should dampen price pressures. The cost of overly restrictive monetary policy is therefore rising swiftly – a rate cut in September would be warranted. Overall, the continued surge in global liquidity continues to dominate developments on financial markets, offsetting potential risks of an economic slowdown or higher inflation.

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