August monthly market update - Reflections on July 2025

Technology-led gains in the US, a new trade deal between America and Europe, and resilient growth in China help lift global stocks, despite inflation concerns.

US stocks climbed to fresh highs in July, supported by strong performance in the tech sector and renewed optimism around trade negotiations. Sentiment was further boosted after the European Union reached a trade deal with President Donald Trump, easing fears of an escalating trade war.

The US has made significant progress on trade in recent weeks, also announcing agreements with South Korea and Japan, with tariffs of 15% on goods. Trump had previously reached deals with Britain, Vietnam and Indonesia, and paused the tariff war with China.

The US Federal Reserve (Fed) held its benchmark short-term interest rate steady, despite pressure from Trump to cut rates. Markets still expect one more rate cut this year, though the Fed gave no indication of timing.

US inflation rose in June as the effects of tariffs began to filter through to consumers. Consumer prices climbed to 2.7%, up from 2.4% in May, marking the fastest rise since February. The increase suggests firms are passing on higher import costs. The US economy and labour market remain stronger than expected, giving the Fed scope to hold rates. In June, 147,000 jobs were added despite concerns tariffs would slow hiring. The unemployment rate fell to 4.1%, from 4.2% in May.

After a weak start to the year, the dollar has stabilised on the back of stronger economic data. However, consumer spending has slowed, as households grow more cautious.

UK stocks hit another record high

UK stocks rebounded after a shaky start to July, as fears that Chancellor Rachel Reeves might resign were quickly brushed aside. The FTSE 100 surged to a record high, with investors largely unfazed by global trade tensions.

However, signs of economic strain are building. UK inflation rose unexpectedly to 3.6% in June, an 18-month high, up from 3.4% in May. The Bank of England is still expected to cut rates in August and again later this year.

There was further bad news after the UK economy contracted by 0.1% in May, following a 0.3% fall in April, driven mainly by weaker manufacturing output. This marked the second consecutive monthly decline despite the pause on US tariffs.

The downturn comes after Reeves raised taxes on businesses. Economists now warn that growth could be softer than previously expected after a strong start to the year.

Unemployment rose and wage growth slowed in the three months to May. The jobless rate climbed to a four-year high of 4.7%, while pay growth eased to 5%, with many blaming April’s rise in employer National Insurance contributions.

Reeves is expected to announce further tax rises in the autumn Budget, though a weaker economy and rising joblessness could make this harder to implement without damaging growth.

EU and US agree trade deal

Global stocks rose after the US and EU reached a long-awaited trade deal, easing tensions that had unsettled markets for months. The agreement imposes a 15% tariff on European exports to the US – half the 30% rate previously threatened by Trump. The European Central Bank (ECB) kept interest rates unchanged at 2% amid ongoing uncertainty, having already cut rates four times this year.

Eurozone inflation increased in June, returning to the ECB’s 2% target and reinforcing its cautious stance. Businesses remain broadly optimistic, though profits remain under pressure, partly due to trade tensions. Growth in the region has been weak in recent years, and a sustained recovery has yet to take hold. Still, firms are maintaining high employment levels in the belief that conditions will improve.

The euro rose to $1.18 against the dollar, its highest level since September 2021, before easing towards the end of the month. It has gained more than 12% against the dollar this year, supported by improving eurozone growth expectations and broad dollar weakness.

China’s economy grows amid headwinds

China’s economy expanded by 5.2% in the second quarter, showing resilience despite the drag from US trade tensions. The world’s second-largest economy has so far avoided a downturn, supported by government stimulus and a temporary truce with the US. Exports rose 5.8% in June as firms rushed to ship goods before the August deadline. Imports were up 1.1% year on year.

However, underlying weaknesses remain. Inflation turned positive for the first time since January, yet deflationary pressures persist. Domestic demand is still soft, weighing on growth despite Beijing’s stimulus efforts. Retail sales growth has also slowed as job concerns weigh on consumer spending.

Official data showed new home prices fell at their fastest monthly pace in eight months, pointing to continued pressure in the property sector despite repeated policy support. Meanwhile, manufacturing activity contracted for a third straight month in June, underlining the challenges facing China’s recovery.