Global Markets Declined Amid Trump Tariff Threats and Economic Uncertainty. A look back at last week.

Global Markets Declined Amid Trump Tariff Threats and Economic Uncertainty;

London equities closed lower on Friday, surrendering earlier gains as fresh trade tensions dampened investor sentiment despite encouraging domestic economic indicators.

The FTSE 100 index slipped 0.24% to finish at 8,717.97 points, while the mid-cap FTSE 250 declined more sharply by 0.44% to close at 20,708.72 points. Markets reversed some of the losses after both European and U.S. stocks dropped by as much as 2% following President Trump's threat to impose a 50% tariff on European Union imports starting June 1.

Despite equity weakness, sterling showed resilience in currency markets. The pound strengthened 0.69% against the dollar to trade at $1.3511 and edged up 0.085% versus the euro to €1.1904.

UK economic data provided welcome positive news, with retail sales jumping 1.2% in April, significantly outpacing forecasts of just 0.3% growth. The strong performance was driven by a robust 3.9% rebound in food store volumes, as warmer weather boosted consumer activity across supermarkets, bakeries, and off-licences.

"Sunny skies and warm temperatures helped boost retail sales in April with strong trading across most sectors," explained Hannah Finselbach, senior statistician at the Office for National Statistics. "After a poor couple of months, food sales bounced back with supermarkets reporting robust sales, while it was also a positive month for butchers and bakers, alcohol and tobacco stores."

However, the retail picture wasn't uniformly positive. Clothing sales declined following a strong March, though department stores and household goods retailers posted growth for the month.

Consumer sentiment also brightened, with the GfK consumer confidence index rising three points to -20 in May. The improvement reflected better personal finance expectations and a more optimistic economic outlook, though confidence levels remained below those recorded a year earlier.

Neil Bellamy, consumer insights director at GfK, suggested that consumers may have "taken comfort" from the recent interest rate reduction, contributing to the more positive sentiment.

Households received some relief on energy costs, with Ofgem announcing a 7% reduction in energy bills starting in July. The regulator lowered the typical annual household bill to £1,720, representing a substantial 28% decrease from the 2023 peak. However, bills remained 10% higher than the previous year, providing only limited relief amid broader financial pressures from rising taxes and utility charges.

Earlier in the week, UK inflation data initially raised concerns as the rate ticked up to 3.5%. However, a deeper analysis reveals the increase is less problematic than surface figures suggest.

Approximately half of the inflation rise stemmed solely from increased road tax, with personal transport services contributing 0.5 percentage points to the increase. This tax-related impact will persist for the next 12 months before dropping out of annual comparisons, and the Bank of England will likely disregard this component, as it typically does with other tax changes such as VAT adjustments.

The remaining services inflation increase can be largely attributed to air fares and package holidays, both affected by Easter timing distortions. Last year's March Easter created unusual year-over-year comparisons, while this year's data collection occurred unusually close to Good Friday itself. This timing amplified the month-on-month rise in plane tickets to 28%—an exaggeration that should normalise over the coming months.

The combination of robust retail sales, improving consumer confidence, and manageable underlying inflation trends suggests the UK economy is showing signs of resilience. However, external headwinds from escalating trade tensions continue to weigh on market sentiment, highlighting the ongoing challenge of balancing domestic recovery against global uncertainty.

Europe

European stocks ended a challenging week significantly lower, with the STOXX Europe 600 Index falling 0.75% and breaking a five-week winning streak. The decline came after U.S. President Donald Trump announced his plans to impose a hefty 50% tariff on goods from the European Union, citing stalled trade negotiations. Turns out negotiating with a 27-nation bloc isn’t as simple as he’d hoped.

The tariff threat sent shockwaves across major European markets. Germany's DAX dropped 0.58%, while France's CAC 40 Index suffered a steeper 1.93% decline. Italy bore the brunt of the sell-off, with the FTSE MIB plummeting 2.90%.

Adding to European woes, new economic data revealed unexpected weakness in the region's business activity. The HCOB Eurozone Composite Purchasing Managers' Index fell to 49.5 in May from April's 50.4, marking a contraction as readings below 50 indicate declining activity. The service sector experienced particularly sharp deterioration, with German business activity shrinking and French output contracting for the ninth consecutive month.

The European Commission responded to mounting trade tensions by cutting its 2025 economic growth forecast to 0.9% from a previous projection of 1.3%. The downward revision directly reflected concerns about rising tariffs and uncertainty surrounding U.S. trade policy. However, the commission offered one bright spot, estimating that inflation would reach the European Central Bank's 2% target by mid-2025, earlier than previously anticipated.

Despite broader regional weakness, Germany delivered positive economic news. First-quarter growth was revised upward to 0.4% sequentially, double the initial estimate and representing a strong rebound from the 0.2% contraction in the final quarter of 2024. The improvement was driven by stronger household consumption, increased fixed investments, and improved net trade, marking Germany's fastest economic growth since the third quarter of 2022.

U.S.

American stock markets also struggled throughout last week, with major indexes finishing lower across the board. Small- and mid-cap indexes performed particularly poorly, while both the S&P 500 and Dow Jones Industrial Average slipped back into negative territory for the year after briefly turning positive the previous week.

The week began quietly but took a dramatic turn Wednesday afternoon when both stocks and U.S. Treasuries declined following a disappointing 20-year Treasury bond auction. The weak demand pushed longer-term yields higher, with the 30-year yield reaching its highest level since 2023, though Treasury markets recovered some ground by week's end.

The bond market weakness was partially attributed to Moody's recent downgrade of U.S. sovereign debt, reflecting concerns about rising federal debt and fiscal deficits. These worries intensified after the House of Representatives passed President Trump's tax bill, which analysts believe could significantly increase federal debt over the coming years.

Friday brought additional market pressure when President Trump announced the European Union tariff plan, effective June 1, and threatened 25% tariffs on iPhones unless Apple relocates production to the United States. Apple shares tumbled more than 3% on the news.

Asia

Japanese markets declined over the week, with the Nikkei 225 Index falling 1.57% and the broader TOPIX Index dropping 0.18%. The weakness reflected growing market expectations for further monetary policy tightening by the Bank of Japan following stronger-than-expected inflation data.

The yield on 10-year Japanese government bonds rose to 1.55% from the previous week's 1.46%, approaching levels not seen since 2008. Rate hike expectations also strengthened the Japanese yen, which reached 143.6 against the U.S. dollar, its strongest level in over two weeks. Concerns about U.S. fiscal policy provided additional support for the yen.

Meanwhile, Japan's lead trade negotiator Ryosei Akazawa prepared for a third round of trade talks in Washington, reportedly maintaining the government's position in seeking broader tariff exemptions from the United States.

Chinese mainland markets declined modestly as attention returned to economic fundamentals following a temporary trade truce between Beijing and Washington. The onshore CSI 300 Index fell 0.18% while the Shanghai Composite Index dropped 0.57%. Hong Kong's Hang Seng Index bucked the trend, gaining 1.10%.

Fresh economic data provided the first glimpse of China's performance amid escalating U.S. trade tensions. Industrial output offered encouraging news, rising 6.1% year-over-year in April, exceeding expectations. However, retail sales growth—a key indicator of consumer spending—weakened to 5.1% from March's 5.9%, falling short of forecasts.

Fixed asset investment, which includes property and infrastructure spending, rose 4% from January through April but trailed estimates due to continued weakness in property investment.

The uptick in industrial production suggests China successfully avoided a significant economic slowdown during the initial phase of renewed trade tensions in April. However, the decline in retail sales growth reinforces economists' views that Beijing needs additional spending incentives to boost consumer confidence.

China possesses sufficient financial resources to mitigate the impact of U.S. tariffs and could implement fiscal stimulus measures in stages as the government evaluates their economic effects.

The Week Ahead: Nvidia Earnings and Fed Insights Take Centre Stage

While the corporate earnings calendar lightens this week, key economic data releases and a highly anticipated tech giant's results promise to keep markets active as May draws to a close.

Though fewer companies are reporting, several notable FTSE 350 names will update investors, including retail giant Kingfisher, pet retailer Pets at Home, digital marketplace Auto Trader, IT services provider Softcat, beverage company C&C Group, and entertainment venue operator Hollywood Bowl. The week's marquee earnings event comes Wednesday night with Nvidia's quarterly results. Given the chipmaker's outsized influence on both sides of the Atlantic—through direct holdings and fund exposure—these numbers will likely drive significant market movement and provide crucial insights into AI demand and semiconductor trends.

Revised first-quarter U.S. GDP figures should provide a clearer picture of economic health, with early estimates showing a concerning 0.3% annualised contraction. However, economists widely believe these initial numbers understated actual growth, and the revision should offer a more accurate assessment of the economy's trajectory. The Federal Reserve's preferred inflation measure—core Personal Consumption Expenditures (PCE) prices—will be updated, providing critical insight into price pressures that have been rising despite economic weakening. This data will be particularly significant given recent tariff announcements and their potential inflationary impact.

U.S. goods trade data will shed light on export performance, which has declined for two consecutive months according to preliminary indicators. The release of FOMC meeting minutes from the latest policy gathering will offer valuable insight into Fed officials' thinking on future rate cuts amid mounting tariff uncertainty.

Recent flash PMI data painted a mixed but largely subdued picture. While U.S. business activity and confidence improved from April's lows, both measures remained weak by recent standards, suggesting annualised GDP growth of just 1% in the second quarter, well below trend. More troubling, exports of goods and services fell for the second straight month, with service exports (including foreign spending in the U.S.) declining at the sharpest rate since pandemic lockdowns. These trends underscore growing economic headwinds.

Trade tensions are already impacting business behaviour, with the S&P Global PMI recording the largest manufacturing input inventory buildup ever measured. Companies are stockpiling supplies amid intensifying shortages and the biggest price spike since November 2022. Notably, while other G4 economies saw falling price pressures in May, the U.S. bucked this trend with rising costs—a development that could signal sharply higher consumer price inflation ahead.

These mixed economic signals support S&P Global Market Intelligence's forecast that the Federal Reserve will maintain current interest rates through December, when a further cut is anticipated. FOMC minutes and scheduled policymaker speeches this week should provide additional clarity on the Fed's thinking. While the U.S. central bank remains cautious, rate cuts are anticipated this week in both New Zealand and South Korea, highlighting divergent global monetary policy paths.

The effect of U.S. tariff threats on mainland China will come into focus through NBS PMI data, while official industrial production figures from Japan and India will provide broader insight into Asian economic momentum. Key events to watch include Nvidia's Wednesday evening earnings release, revised U.S. GDP and core PCE inflation data throughout the week, FOMC meeting minutes publication mid-week, and the conclusion of May's payroll period for many workers.

As markets navigate this confluence of corporate results, economic data, and policy signals, investors will be particularly focused on whether recent tariff announcements begin translating into measurable economic and inflation impacts, setting the stage for potential shifts in both market sentiment and central bank policy.

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