The Weekend Wrap. UK Markets End May on Positive Note Despite Global Trade Uncertainties

UK Markets End May on Positive Note Despite Global Trade Uncertainties

British equity markets concluded the month with modest gains, as investors found reasons for optimism despite ongoing global trade tensions that continue to influence commodity prices and currency movements.

The FTSE 100 index delivered a solid performance on the final trading day of May, advancing 0.64% to settle at 8,772.38 points. The mid-cap FTSE 250 showed more restrained movement, edging up just 0.14% to reach 21,028.01 points.

This UK performance stood in contrast to Asian and U.S. markets, which experienced declines on the month's final session. However, most European markets managed to recover some ground after Thursday's trade uncertainty-induced selling pressure. Despite these late-month fluctuations, May ultimately delivered gains across major global equity indexes.

Currency markets told a different story for UK assets, with sterling experiencing weakness against both the dollar and euro. The pound declined 0.27% against the U.S. dollar, trading at $1.3456 by session's end. Against the euro, sterling slipped a more modest 0.085%, to trade at €1.1861.

Commodities Reflect Trade Tension Impact

Energy markets demonstrated the broader impact of escalating U.S.-China trade tensions, with oil prices falling approximately one per cent and marking a second consecutive weekly loss. Market attention was focused on Saturday's OPEC+ meeting, where the producer group was expected to consider increasing output by 411,000 barrels per day. This potential move would continue the gradual reversal of voluntary supply cuts that began in April.

Precious metals markets also reflected changing sentiment dynamics. Following the previous week's positive performance, both gold and silver prices were tracking toward weekly losses as the U.S. dollar regained strength, recovering from sharp declines experienced in earlier sessions.

UK Business Confidence Surges to Nine-Month High

Economic sentiment within the UK showed marked improvement, providing a bright spot amid global uncertainties. Business confidence reached its highest level in nine months during May, supported by easing global trade tensions and recovering financial markets.

The Lloyds Business Barometer revealed an impressive 11-point jump to 50, completely reversing April's sharp deterioration that had been triggered by President Trump's aggressive tariff announcements. This recovery demonstrated the sensitivity of UK business sentiment to global trade developments.

The improvement was broad-based across different confidence measures. Economic optimism surged 16 points to 44, while companies' expectations for their own trading prospects climbed to 56. These gains suggest businesses are becoming more positive about both the broader economic environment and their individual performance prospects.

Different sectors of the UK economy displayed varying levels of optimism. The construction industry reached a nine-month confidence high, reflecting potential for increased activity in this crucial sector. The services sector, which dominates the UK economy, posted its strongest reading in a full year, indicating robust sentiment across this broad category of businesses.

However, retail sentiment provided a note of caution, slipping to its lowest level since January. This decline in retail confidence may reflect ongoing consumer spending pressures or sector-specific challenges facing UK retailers.

In an interview with the Financial Times on Friday, Alan Taylor, a Bank of England rate setter, argued that April’s surprise uptick in the consumer price index - from 2.6% to a year-high of 3.5% - was caused by one-off factors, and said he remained "pretty concerned" about the growth outlook for the economy.

The member of the Monetary Policy Committee acknowledged there had been some "welcome" developments in trade.

But these only affected a small part of UK trade, he argued, and that Donald Trump’s sweeping global tariff regime remained a threat.

Taylor told the newspaper: "I am seeing more risk piling up on the downside scenario because of global developments", with the impact of tariffs on imports "building up over the rest of the year in terms of a trade diversion and drag on growth."

Europe

European stock markets posted solid gains as investors welcomed both diplomatic progress on trade tensions and encouraging inflation data across the continent.

The STOXX Europe 600 Index, which tracks stocks across the region, climbed 0.65% by market close. This upward movement came after President Trump announced he would extend negotiations with the European Union before implementing previously threatened 50% tariffs, providing markets with much-needed breathing room.

Individual country indices demonstrated even stronger performance in some cases. Germany's DAX surged 1.56%, Italy's FTSE MIB posted similar gains of 1.55% while France's CAC 40 Index saw more modest but was still positive adding 0.23%.

Inflation Trends Support Rate Cut Expectations

The positive market sentiment was further bolstered by encouraging inflation data from several major European economies. Both Spain and Italy reported preliminary inflation figures of 1.9% for May, positioning these economies just beneath the European Central Bank's 2% inflation target.

France delivered particularly impressive results, with consumer prices rising only 0.6% year-over-year, representing a significant improvement from April's 0.9% rate. Germany's inflation picture was more mixed, with annual consumer price growth of 2.1% - an improvement from the previous month's 2.2% but slightly above analyst expectations from Bloomberg surveys.

However, the inflation outlook contains some contradictory elements. The ECB's latest Consumer Expectations Survey revealed that eurozone households anticipate inflation of 3.1% over the coming year, marking an increase from March's 2.9% expectation. This consumer sentiment diverges from the central bank's own forecasts, which project continued inflation deceleration throughout the year.

Adding complexity to the economic picture, Germany's employment situation deteriorated more than anticipated in May. Unemployment rolls expanded by 34,000 people on a seasonally adjusted basis, bringing the total to 2.96 million - significantly exceeding the 10,000 increase that analysts had predicted and approaching the psychologically important 3 million threshold.

The labour market weakness extended beyond unemployment figures, with job vacancies falling by 67,000 compared to the same period last year, dropping to 634,000 total openings. This decline suggests employers are becoming more cautious about hiring, reflecting broader concerns about economic momentum in Europe's largest economy.

The U.S.

American stock markets delivered solid gains during a truncated trading week, though late-week developments around trade policy created some volatility that prevented indexes from holding their peak levels.

The technology-heavy Nasdaq Composite emerged as the week's standout performer, surging 2.01%. The broader S&P 500 Index wasn't far behind with a 1.88% advance, while the blue-chip Dow Jones Industrial Average contributed 1.60% gains. Even smaller-capitalisation stocks, which typically underperform during uncertain periods, managed to post positive returns for the week.

Trade Policy Whiplash Drives Market Volatility

The week began on an optimistic note following President Trump's weekend decision to postpone imposing harsh 50% tariffs on European Union imports. Originally scheduled to take effect immediately, these tariffs were delayed until July 9, with the administration promising to "fast-track" negotiations with European partners. This diplomatic reprieve provided the initial catalyst for the week's strong market opening.

However, Thursday brought dramatic developments that showcased the market's sensitivity to trade policy news. The U.S. Court of International Trade delivered a significant ruling, determining that President Trump lacked the legal authority to implement most of the global tariffs enacted since his second term began. This decision initially sent stocks soaring Thursday morning.

The celebration proved short-lived. The Trump administration immediately appealed the court's decision, and by Thursday evening, a federal appeals court had issued a temporary stay on the ruling. This rapid reversal of fortune caused stocks to surrender some of their earlier gains as the week concluded.

Adding to the uncertainty, Treasury Secretary Scott Bessent acknowledged that U.S.-China trade discussions had become "a bit stalled." The situation grew more complicated when President Trump made unverified social media statements suggesting China had "violated" preliminary agreements between the two nations. These comments further dampened investor enthusiasm as the week progressed.

Inflation Shows Encouraging Moderation

Beyond trade policy drama, economic data provided some positive developments for investors. The Bureau of Economic Analysis released April figures for the core personal consumption expenditures index, the Federal Reserve's preferred inflation gauge. The annual rate declined to 2.5% from March's 2.7% reading, marking the slowest pace of price increases in four years since 2021.

While this downward trend encouraged market participants, the inflation rate remains notably above the Federal Reserve's long-term 2% target. Many analysts anticipate that the full inflationary impact of current and proposed tariffs won't become apparent until later in the summer months.

The Federal Reserve's own assessment, revealed in minutes from their May 6-7 meeting released Wednesday, showed continued concern about inflation's trajectory. Policymakers maintained their view that "risks around the inflation forecast as skewed to the upside," citing significant "uncertainty surrounding trade policy and other economic policies."

Consumer confidence provided another bright spot in the week's economic data. The Conference Board's Consumer Confidence Index experienced a remarkable turnaround in May, jumping 12.3 points to reach 98 after five consecutive months of deterioration.

According to Stephanie Guichard, Senior Economist for Global Indicators at The Conference Board, the recovery had multiple phases. "The rebound was already visible before the May 12 U.S.-China trade deal but gained momentum afterwards," she explained. The improvement was particularly pronounced in forward-looking measures, with all three components of the Expectations Index rising from their April lows, suggesting consumers became more optimistic about future economic conditions as trade tensions appeared to ease.

Asia

Japan’s stock markets rebounded over the week, with the Nikkei 225 Index gaining 2.17% and the broader TOPIX Index up 2.41%, amid rising hopes of a trade agreement between the U.S. and Japan. Prime Minister Shigeru Ishiba and President Donald Trump reportedly held a constructive telephone call on Thursday ahead of the fourth round of talks in Washington. This, together with Trump’s backing for Nippon Steel’s bid for U.S. Steel, fuelled speculation that both sides are paving the way for an accord by the time of the G7 meeting in mid-June, when both leaders plan to meet.

The yield on the 10-year Japanese government bond (JGB) fell to around 1.51% from 1.55% at the end of the previous week, although the yield remains around 2008 highs, as renewed trade tensions fuelled demand for haven assets. JGB yields declined along with those of U.S. Treasuries after the reinstatement of Trump’s “reciprocal” tariffs.

Mainland Chinese stock markets retreated as a light economic calendar and a pause in the U.S.-sparked trade war dampened buying sentiment. The onshore benchmark CSI 300 Index fell 1.08% and the Shanghai Composite Index shed 0.03% in local currency terms, according to FactSet. In Hong Kong, the benchmark Hang Seng Index declined 1.32%.

After the pause in the tariff war that the U.S. and China negotiated earlier in May, Beijing has stepped up efforts to help shield its economy ahead of the expiration of the 90-day negotiation window in August. China plans to allocate RMB 500 billion, or roughly USD 70 billion, of capital to invest in new infrastructure projects, Bloomberg reported, citing unnamed sources. Under the so-called new financing policy tool, China’s three state-run policy banks will raise funds and buy stakes in projects such as artificial intelligence, the digital economy, and consumption-related infrastructure.

Separately, officials who are preparing Beijing’s next Five-Year Plan starting in 2026 are studying whether to maintain the share of manufacturing in gross domestic product at a stable level over the longer term, Bloomberg reported, citing unnamed officials. Though officials are still hashing out the next Five-Year Plan—which serves as an economic blueprint for the country—the reports suggest that Beijing plans to stick with its manufacturing-driven economic strategy, which the U.S. and Europe have criticized for fuelling trade imbalances.

Week Ahead: Central Bank Decisions and Employment Data Take Centre Stage

The coming week promises significant market-moving events as investors focus on key economic indicators and monetary policy decisions that could shape the global economic outlook.

ECB Rate Cut Appears Inevitable Amid Economic Weakness

Financial markets are positioning for another interest rate reduction from the European Central Bank when officials convene for their June policy meeting. Both consensus forecasts and market pricing indicate widespread expectation for additional monetary easing.

The ECB's recent policy trajectory reflects mounting economic pressures across the eurozone. At April's meeting, policymakers delivered their seventh consecutive 25 basis point cut, bringing the Deposit Rate down to 2.25% from its previous peak of 4.00%. This aggressive easing cycle represents the central bank's response to deteriorating growth prospects and moderating inflation amid widespread uncertainty over trade policies.

Recent economic data has reinforced the case for continued accommodation. The flash PMI survey revealed eurozone business activity contracting in May, while inflationary pressures cooled markedly, particularly within the services sector. Employment growth has also stagnated, creating a concerning combination of factors. A composite PMI indicator incorporating these various measures has moved deeper into territory that historically signals the need for rate cuts.

Eurozone Growth Outlook Remains Subdued

Economic forecasts paint a picture of continued sluggish expansion for the European economy. Growth projections for 2025 stand at just 0.8%, essentially matching the lacklustre performance recorded in 2024. This persistent weakness underscores the challenges facing European policymakers.

However, some factors may provide modest support for the region. A stronger euro currency, declining energy costs, and reduced import prices could help contain inflation. Additionally, trade diversion effects may benefit Europe as commerce shifts away from the United States toward European markets, particularly involving goods from mainland China.

U.S. Employment Report Could Signal Fed Direction

American monetary policy watchers will scrutinise Friday's comprehensive employment report for insights into the Federal Reserve's next moves. The data release will provide updated figures on non-farm payrolls, wage growth, and unemployment rates.

April's employment report delivered mixed signals, with non-farm payrolls expanding by 177,000 positions, surpassing consensus expectations but representing a deceleration from March's 185,000 gain. The unemployment rate remained stable at 4.2%, suggesting labour market resilience.

Growing concerns centre on whether recent tariff announcements will begin impacting hiring decisions. The full effects of April's trade policy changes may not yet be reflected in current data, potentially creating uncertainty about future employment trends.

Global PMI Data to Reveal Tariff Impact

The worldwide release of Purchasing Managers' Index surveys for both manufacturing and services sectors will provide crucial insights into how global trade tensions are affecting business conditions across different economies.

Preliminary data has already shown divergent performance among major developed markets. The United States appears to be outperforming, while the eurozone, Japan, and the United Kingdom have all reported modest declines in business activity levels.

Analysts note that some recent business strength may be artificially inflated due to companies accelerating purchases ahead of anticipated tariff implementations. This "front-running" effect could mask underlying weakness in demand patterns.

China Data Particularly Significant

Among the various PMI releases, mainland China's data will receive especially close attention given the country's central role in recent trade policy developments. The uncertainty surrounding ongoing tariff adjustments makes Chinese business sentiment indicators particularly valuable for assessing broader global economic implications.

These data points will help investors and policymakers better understand how evolving trade relationships are reshaping global economic dynamics and influencing business confidence across different regions.

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