In July global equity markets staged a modest recovery despite the absence of any clear resolution to the numerous overhanging risks. US equities led the way, although the rally lacked broad conviction and came against a backdrop of deteriorating forward indicators. Investor sentiment was temporarily lifted by the perception that the most aggressive tariff threats from earlier in the year have either been walked back or delayed. Furthermore, the passing of the “Big Beautiful Bill”, provided further positive stimulus. However, beneath the surface, business confidence remains weak given recent tariff volatility.
Headline economic data remained patchy in July. While unemployment has not materially increased, a clear slowdown in job creation has emerged, particularly in manufacturing and logistics, the two sectors heavily exposed to the uncertainty caused by US trade policy. Meanwhile, anecdotal reports of weaker consumer confidence are beginning to appear in retail and service sector earnings.
Inflation data provided mixed messages. Goods inflation appears to be receding due to easing supply chain constraints and softer input costs, but services inflation remains persistent. Wage growth continues to run above historical averages, particularly in sectors facing labour shortages. Central banks remain concerned about second-round effects.
The impact of the “Big Beautiful Bill” has become more apparent as July progressed. While the headline boost to short-term GDP growth remains speculative, the expansionary fiscal stance has fuelled further questions about the sustainability of US public finances. Long-term government bond yields have climbed once more, with investors demanding higher premiums amid rising debt issuance.
Geopolitical tensions remain elevated, although no major escalations occurred in July. The ceasefire in Iran held, but tensions remain just below the surface. In Europe, the focus remained on defence and energy independence. The UK unveiled a new national security strategy, prioritising local supply chains and boosting domestic energy production. Continental European nations, particularly the Nordics, followed suit with further defence budget increases in line with NATO’s revised 5% commitment.
The economic implications of this structural reorientation are only beginning to emerge. While near-term growth may benefit from increased public investment, questions remain about the long-term efficiency and inflationary consequences of shifting global supply chains and defence postures.
While equity markets have shown signs of recovery, the underlying risks to the global economy remain significant. Trade policy, fiscal sustainability, and geopolitical instability continue to loom large. Investors should be cautious not to mistake temporary market resilience for a return to stability. As we enter the latter half of the year, market direction will likely hinge on developments in US fiscal and trade policy, the trajectory of inflation, and the ability of central banks to navigate an increasingly complex macroeconomic landscape.
