Global Market Overview | May 2025

03 June 2025

Written by the FNB Wealth and Investments Research team

Despite ongoing waves on uncertainty, the recovery from the lows seen in April following President Donald Trump’s “Liberation Day” continued into the month of May. This was a function of de-escalating trade tensions, possible ceasefires in ongoing conflicts and a reduction in the odds of a recession hitting the United States (US). Markets followed the “whipsaw” trend in reaction to President Trump’s tariff announcements and delays, with key central bank meetings also dominating news flow. The US dollar held investor attention, reaching lows last seen in July 2023 as policy uncertainty and the risk of a widening US fiscal deficit diminished the appeal of the currency.

At the start of the month, markets were poised for heightened volatility with trade developments still in flux. In addition, investors expressed concerns surrounding Trump’s recently passed tax-and-spending bill that will result in a further widening of the US budget deficit, as well as Moody’s downgrade of its US credit rating. However, market sentiment held as a major de-escalation in trade tensions triggered a risk rally and the S&P 500 delivered an outstanding 6.3% improvement for the month on a total return basis. Investors were surprised that China and the US concluded a deal to reduce trade tariffs for a 90-day period to move towards a more nuanced trade deal between the two nations. China reduced tariffs on US goods from 125% to 10% and the US slashed levies on Chinese goods from 145% to 30%. This also helped to push Chinese indices higher with the MSCI China Index adding 3.9% for the month. Sentiment gained a further boost after most of Trump’s global tariffs were deemed illegal and blocked by the US trade court. 

The US Federal Reserve’s Federal Open Market Committee (FOMC) held its interest rate target range at 4.25% to 4.5%, as was widely anticipated. The focus was, however, on the accompanying statement from the committee that highlighted that tariff increases had been significantly larger and more extensive than anticipated, with growing uncertainty surrounding the direction of trade policy and the magnitude, scope, timing, and duration of its economic effects. Policymakers’ uncertainty was unusually high and judged that downside risks to employment and economic activity, as well as upside risks to inflation, had increased. Still, inflation data out of the largest economy in the world remained subdued and economic activity data held up. The derivative market is still pricing in three 25bps cuts from the Fed this year, weighted toward the end of the year (currently September, October, and December).

The Euro Stoxx 600 Index achieved solid gains as well, ending the month up 5.1% despite tariff negotiation headwinds. While Trump had threatened to impose a 50% tariff on imports from the European Union, he then delayed the implementation date to 9 July, as opposed to the initial date of 1 June, to allow for further discussions.

Key events on the local side included the release of Budget 3.0, the Trump/Ramaphosa meeting and the South African Reserve Bank’s (SARB) interest rate announcement.

The latest budget confirmed the withdrawal of the previously proposed VAT rate increase and, consequently, the removal of the expanded zero-rating. It still introduces tax increases via fiscal drag and above-inflation increases in excise duties on alcohol and tobacco. Overall, Budget 3.0 was neutral from a market perspective.

While the Trump/Ramaphosa meeting was termed as “intense”, at a post-meeting media briefing President Ramaphosa highlighted that constructive closed-door talks took place about continuing to engage on trade and he expressed confidence that he would see Trump at the Group of 20 meeting of leaders in Johannesburg in November.

The SARB cut the repo rate by 25bps, in line with consensus expectations. The move was regarded as a “dovish cut” with all members voting for a cut in rates and one member advocating for a 50bps reduction. The SARB also presented a 3.0% inflation target scenario. In this scenario, the repo rate would stay higher for longer and growth would see some near-term impacts, but it is ultimately expected to result in higher growth and lower interest rates over time. The All Share Index ended the month up 3.2% (USD: +6.6%).

Outlook

Local

• Global uncertainty continues to evolve. While countries are scrambling to avoid the reinstation of the reciprocal tariffs in July, it will be interesting to see what strategies the US administration will employ to uphold the now legally disputed tariff regime. Either way, developments around global policy will maintain a turbulent environment. For SA’s trading partners, the SARB has downgraded growth forecasts from 3.1% in 2025 and 2026 to 2.5% and 2.9%, respectively.
• The less supportive external backdrop and a weak start to 2025 has also led the SARB to lower SA’s growth forecast to 1.2% (from 1.7%) in 2025; 1.5% (1.8%) in 2026; and 1.8% (2.0%) in 2027. This is more aligned with our current forecast of 1.3%, 1.6%, and 2.0% over the same period. While household spending should support the near-term outlook, a structural investment drive and lessened structural constraints remain pertinent for growth over the medium term.
• Inflation should remain subdued, averaging 3.5% this year, as the low starting point, a stronger rand, softer oil prices and the removal of the VAT increase weaken the 2H25 uptrend. Inflation remains below the midpoint over the medium term – broadly in line with SARB projections.
• The MPC resumed their interest rate cutting cycle at the May meeting, delivering another 25bps cut. We still believe that there is space to cut further in 2H25 – our current baseline is for another 25bps, leaving rates at 7%. This will be supported by weak local inflation and further Fed cuts.
• The SARB has started to communicate their desire to shift to a lower target, publishing a forecast scenario on a 3% target alongside their latest statement. This scenario envisions a rapid adjustment in inflation expectations, supported by currently soft inflation and restrictive monetary policy, that aids the embedding of inflation at current levels. A lower inflation target increases the efficacy of monetary policy and reduces neutral interest rates – ushering in lower interest rates over the longer term. To take advantage of the prevailing disinflation trend, the MPC will need to move soon.

Global

• Proposed policy changes by Trump (tariffs, taxes, deportations, and deregulation) are increasing uncertainty in global markets and economies. Implementation (or not) of these policies will dictate the direction of markets over the next few months. The US Economic Policy Uncertainty Index improved somewhat this month as Trump lowered tariffs on China (from 145% to 30%), and China responded by cutting tariffs on the US from 125% to 10%.
• US growth expectations have continued to turn negative. Since the 2 April “Liberation Day” reciprocal tariff announcement, Bloomberg consensus for US 2025 GDP has fallen from 2.3% to 1.4%. “Soft” data, such as business and consumer expectations, improved somewhat during the month, but remained under pressure. So called “hard” economic data improved slightly in May (with better-than-expected payrolls and slightly lower inflation). Our house view is for US growth to slightly underperform consensus in 2025.
• This month, US CPI and core CPI surprised slightly to the downside, coming out at 2.3% and 2.8%, respectively. Inflation expectations also improved marginally from a high base: University of Michigan one-year inflation expectations fell to 6.6% from 7.3% in the previous month. This is still some way off the 2% target of the Fed. Shelter inflation and core services should continue to trend lower, causing overall inflation to move down towards target, but risks remain that inflation proves “stickier” than expected (depending on the rates where tariffs eventually settle).
• The Fed’s interest rate cutting cycle that started in September 2024 has come to a roadblock as they paused rates again at their latest May meeting. The Committee said that they are “attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen”. The uncertainty of potential policy changes (like tariffs and deportations) should keep them more data dependent going forward.
• Rating agency Moody’s downgraded the US credit score from Aaa to Aa1, citing concerns about ballooning debt and deficits.
• In emerging markets, China lowered policy rates to stimulate growth. Fiscal support is also being provided (the level of support will depend on the severity of tariffs).
• The US dollar stabilised towards the end of the month, after a very poor performance the previous month. Capital flows for the month have been out of the US into other less expensive markets as uncertainty remains.
• Gold also traded sideways in May but remained at elevated levels. Reasons include central bank buying, geopolitical tensions, uncertainty around policies, and investor appetite growing.
• Given all the above uncertainties, we are closely aligned to our strategic asset allocation benchmarks, with a slight defensive twist. We slightly favour fixed income over equities.