Now that we can look back on the second quarter of 2025, it seems quite surreal that markets have remained so promising. We have moved from sky-high tariffs to bunker-busting bombs, all theoretically building a new wall of worries for investors, but as is often the case, markets moved on quite quickly. By the book, investors should have adopted a risk-off stance. Yet global equities moved forwards while the dollar tumbled to its lowest level in three years, another reminder that trading on headlines is rarely a profitable strategy.

The new administration in the US has certainly been put in its place by the US bond market, as alarm bells began ringing when the 10-year US Treasury yield jumped 50 basis points in the week following Trump’s Liberation Day tariff announcements. This makes sense, as tighter financial conditions (debt being more expensive and harder to come by) benefit no one: not households applying for new mortgages, not businesses seeking to finance fresh investments, and certainly not the government, which faces significant refinancing needs as a large portion of its debt matures this year. The same is also true here in the UK. Recently, Trump described the Fed chair as ‘a very dumb, hard-headed person,’ claiming that cutting interest rates could save the US more than USD 800 billion annually. I wish I had such an imaginative calculator at my disposal.

What keeps investors hopeful is the expectation that tariffs will be resolved at sufficiently low levels for their impact to remain a one-time shock. This outlook is likely accurate regarding inflation, given that supply-and-demand dynamics differ significantly from those three years ago. However, the effect on economic growth could prove to be more pronounced. The positive aspect is that the transitory nature of inflation should allow the Fed to ease monetary policy by cutting interest rates when the economy contracts. But it could be a costly policy mistake to wait for winter to arrive. According to the Yale Budget Lab, the average US tariff rate currently stands at 15.8%, marking the highest level of tariffs the country has had in nearly nine decades. One hopes that instead of waiting for lagging indicators to deteriorate and then reacting with an emergency rate cut, as was the case last September, it may be wiser for the Fed to resume cutting rates today, as this would allow for a more gradual and controlled approach.

It has been interesting to watch the impact of Trump on the US dollar, which just posted its weakest first half of the year in four decades. It could still go lower as we see a possible end to US exceptionalism meaning a gradual exodus from US assets.

Markets therefore have a good chance to move higher from here, as several US Federal Reserve officials have already adopted a more dovish stance, and additional liquidity could also emerge from regulatory easing, particularly in the banking sector. The Federal Reserve is reportedly considering loosening capital requirements for the largest US banks. One potential change is allowing banks to significantly increase their holdings of government bonds without having to hold extra capital. Such a move would effectively inject further liquidity into the market and could provide support for asset valuations. I am sure that something will happen over the summer that we have not yet thought about, but for now we are quite happy with portfolio positioning of our main investment propositions and hopefully this leaves you well positioned to enjoy your summer. But for now, do have a good weekend.