The July–August 2025 market risk report highlights a softening U.S. labor market, with nonfarm payrolls missing expectations and unemployment edging higher to 4.2%. Wages grew moderately, while tariffs and trade tensions with China continued to weigh on business confidence. Fed Chair Jerome Powell’s Jackson Hole remarks hinted at possible rate cuts in September, sending equities higher and Treasury yields lower. Inflation remained contained at 2.7%, though tariff effects are gradually appearing in consumer prices. Trade talks with China were extended, while Canada dropped most retaliatory tariffs to support broader negotiations.

In Europe, inflation stabilized at 2.0%, though national differences remain pronounced, with Cyprus at 0.1% and Romania above 6%. The ECB is expected to hold rates steady at 2% in September, a shift from prior expectations of further cuts. Oil prices fell sharply in early August but partially rebounded on renewed uncertainty over Ukraine. The Trump–Putin meeting in Alaska failed to deliver a peace deal, with Russia demanding major concessions from Ukraine that Kyiv rejected.

Equity markets diverged: U.S. indices reached record highs, particularly driven by Nvidia and the AI rally, despite warnings about high valuations and limited profitability from AI deployments. European equities were more subdued, with modest losses in Germany and France. In bonds, U.S. yields dropped on rate-cut expectations, while European yields edged slightly higher. Gold surged to a record $3,491 before settling lower, while Bitcoin fell 5%. The U.S. dollar weakened broadly, while the euro, sterling, and yen strengthened.

In Cyprus, inflation eased further, and government bond yields inched higher. Bank of Cyprus posted stable profits in Q2 2025, despite lower net interest income and higher costs, with capital and asset quality indicators improving. Across Europe, banks such as ING and KBC outperformed on strong lending and deposit growth. Overall, markets remain buoyed by expectations of policy easing, but risks around tariffs, overvalued equities, and geopolitical uncertainty pose significant downside threats.

This market report highlights key developments in June and July 2025. In the US, job growth exceeded expectations and unemployment fell to 4.1%, while wage growth and inflation remained moderate. CPI rose to 2.7%, driven partly by tariffs. The Fed held rates steady at 4.25%–4.5% and signaled no decision yet on a September cut. President Trump continued to push for lower rates.

A major US-EU trade deal imposed 15% tariffs on most European goods, averting a trade war but drawing criticism for ambitious EU commitments. US-China talks resumed, aiming to extend the tariff truce. Eurozone inflation edged up to 2.0%, with the ECB holding rates at 2.00% and noting easing price pressures and economic resilience.

US stocks hit record highs, led by AI-driven gains in Nvidia and Microsoft. The S&P 500 rose 4.4%, while European markets also posted modest gains. Oil prices rose 8% amid rising tensions with Russia. Gold fell slightly; Bitcoin surged 10.8% to $117,000.

Bond yields climbed in the US and Europe. The US dollar strengthened across major currencies. In Cyprus, inflation ticked up to 0.5%. US banks beat earnings expectations; European banks showed mixed results.

Macroeconomic events

In the US, nonfarm payrolls rose by 139,000 in May, beating expectations. The unemployment rate held at 4.2%, and average hourly earnings increased by 0.4% month-on-month and 3.9% year-on-year, both above estimates. The Federal Reserve kept rates unchanged at 4.25%-4.5% at its June meeting. Its dot plot still indicates two cuts in 2025, though fewer cuts are now expected in subsequent years. Fed Chair Jerome Powell emphasized that policymakers are “well positioned to wait” and acknowledged the early effects of tariffs on inflation. He warned that further price increases may filter through in the months ahead.

May CPI inflation was 2.4%, up slightly from April and in line with forecasts. Core CPI came in at 2.8%, below expectations. Weakness in energy and vehicle prices offset some upward pressure from shelter and food. Powell later reiterated in congressional testimony that it remains too early to consider cuts, citing persistent inflation uncertainty from tariffs.

In Europe, euro area inflation fell to 1.9% in May from 2.2% in April. Inflation declined in Germany (2.1%), France (0.6%), and Spain (2.0%). Cyprus posted the lowest reading at 0.4%. The ECB cut rates by 25bps in early June, bringing the deposit rate to 2.00%, and revised its 2025 inflation forecast down to 2.0%. The ECB noted that trade uncertainty may weigh on exports but expects government investment to support growth. Analysts are divided on the path forward, with some expecting a pause and others calling for further cuts.

Geopolitical events

Geopolitical tensions eased after a US-brokered ceasefire between Israel and Iran, which followed strikes on Iranian nuclear facilities and retaliatory missile exchanges. Although the ceasefire appears fragile, markets welcomed the news.

Market Trends

The S&P 500 rose 3.5% over the past six weeks and sits just below its all-time high. European indices were more mixed, with Germany’s DAX flat and France’s CAC down 3.3%. US 10-year yields fell to 4.30%, while German 10-year yields dropped to 2.54%, reflecting easing inflation and dovish central banks. Gold gained 2.5% to $3,340 after hitting a record high in mid-June.

Currency Trends

The dollar weakened across major pairs. The euro rose 3.6% to $1.160, while sterling gained 2.4% to $1.361. The dollar also declined against the yen and Canadian dollar.

This market report highlights the key macroeconomic developments in April and May 2025, focusing on the US and Europe. In the US, nonfarm payrolls exceeded estimates, suggesting underlying resilience in the economy despite trade tensions. However, average hourly earnings increased less than estimated, and headline inflation fell to 2.3% in April, its lowest rate since February 2021, primarily driven by shelter prices. Core CPI also rose less than estimated on a monthly basis. The Federal Reserve kept its benchmark interest rate unchanged at 4.25%-4.5% in May, with Chair Jerome Powell noting rising risks of higher unemployment and inflation. He stated the Fed policy is appropriate despite tariff threats and is not looking to cut rates preemptively as inflation remains above the 2% target. Tariffs, particularly President Donald Trump's, were identified as a big, uncertain factor in the inflation outlook. President Trump criticized Powell's decision, calling for lower rates and claiming "virtually NO INFLATION".

Major trade developments included a 90-day suspension of most US-China tariffs, reducing rates from 125% to 10% on agreed goods, leading to a rally in global stocks, particularly in the US, and higher US Dollar and oil prices. A trade deal framework was also announced between the US and the UK. Stock markets reacted little to the April inflation numbers, with markets now expecting the first Fed interest rate cut later in the year, potentially September, with fewer cuts anticipated overall due to reduced pressure from tariffs and inflation staying above target. US Treasury yields moved substantially higher as the Fed remains hawkish. European inflation figures showed the euro area annual rate remained stable at 2.2% in April, with services showing the highest increase, while rates varied across individual countries. Economists expect the ECB to lower its deposit rate more than previously anticipated this year, potentially reaching 1.75% after cuts in June and September. Oil prices were relatively unchanged overall, although they rallied after the US-China trade deal news. Gold prices were down, while Bitcoin saw a significant increase.

The report also covers Q1 2025 earnings from key companies and banks. Bank of Cyprus reported a higher profit of €117mn compared to the previous quarter (€107mn), despite lower revenue, driven by significantly lower expenses and credit losses. The bank's cost/income ratio decreased to 37%, and its Gross NPE ratio improved to 1.8%. They announced a 50% payout ratio for 2024, including a cash dividend and share buyback, and are considering interim dividends. On the US equities front, Amazon and Apple saw initial hits to their share prices after Q1 earnings due to cautious outlooks tied to the trade war, but rebounded following the US-China tariff news. Microsoft's share price surged after strong Q1 earnings. European banks like BNP Paribas and ING Groep also reported Q1 results, with ING exceeding expectations and announcing a new share buyback.

April Summary

Macroeconomic Events

In the US, March’s nonfarm payrolls rose by 228,000, beating expectations, although the unemployment rate edged up to 4.2%. Average hourly earnings increased in line with forecasts but slowed to 3.8% year-on-year, the lowest pace since July 2024. While the labor market remains resilient, uncertainty over President Donald Trump’s tariff policies could lead to more cautious hiring ahead. Inflation eased significantly, with March CPI falling to 2.4% year-over-year, down from 2.8% in February, while core CPI slowed to 2.8%, helped by a sharp decline in energy prices. However, financial markets and policymakers are bracing for future tariff-driven price increases.

The Federal Reserve is now expected to hold interest rates steady through the first half of the year. Despite initial pressure from Trump to cut rates more quickly, Fed officials, including Governor Christopher Waller, emphasized patience, noting that tariff effects would not fully materialize until after midyear. Financial markets have adjusted expectations, now anticipating the next rate cut likely in September or October rather than in May or June.

In Europe, inflation continued to ease in March, supporting the European Central Bank’s ongoing rate cuts. However, policymakers have indicated they may slow the pace of easing as economic conditions stabilize.

Geopolitical Events

Tariff tensions dominated the geopolitical landscape. Trump initially implemented sweeping tariffs on imports from Mexico, Canada, and China, sparking fears of stagflation and damaging investor sentiment. Facing market turmoil and mounting domestic pressure, Trump walked back some tariffs on April 9, triggering a historic rally in US equity markets. However, tariffs on Chinese goods remain exceptionally high, with China showing no signs of re-engaging in negotiations. Chinese officials openly dismissed Trump’s claims of ongoing talks, highlighting deep mistrust and a hardened stance from Beijing. Analysts warned that policy unpredictability has already inflicted lasting economic and diplomatic damage, fostering a global push for strategic independence from the US.

Market Trends

Markets experienced intense volatility. After Trump temporarily reduced tariffs for some trading partners, the S&P 500 surged 9.5% in a single day—its third-largest post-World War II gain—while the Nasdaq Composite posted a 12.2% jump. Nevertheless, optimism remains fragile, with analysts cautioning that underlying economic risks persist due to ongoing uncertainty and elevated tariff rates, especially against China. Traders continue to price in multiple Fed rate cuts for late 2025, but sentiment remains highly sensitive to developments in trade policy and inflation data.

In Europe, equities initially plunged following the announcement of new 10% tariffs by President Trump, but they rebounded after the tariffs were paused for 90 days, helping restore some investor confidence.

Gold performed strongly amid heightened economic uncertainty and volatility in financial markets.

Currency Trends

The US Dollar Index fell 3.2% over the past month as concerns grew about the impact of the trade war initiated by President Trump, with fears of slowing growth, rising inflation, and diminished global confidence in the US. The euro strengthened by 4.2% against the dollar, while the US dollar also weakened against the Canadian dollar, sterling, and the Japanese yen.

Market Outlook Summary: February 2025

Macroeconomic Events

US:
The US labor market showed mixed signals in January, with nonfarm payrolls increasing by 143,000—below expectations—while the unemployment rate edged down to 4.0%. Wage growth exceeded forecasts, rising 0.5% monthly and 4.1% annually. The Federal Reserve kept rates unchanged at 4.25%-4.5%, signaling caution amid persistent inflation, which climbed to 3.0% in January. Core inflation also rose, driven by shelter costs, leading markets to scale back expectations for rate cuts this year. Political uncertainty remains, with President Trump advocating immediate rate cuts and imposing new tariffs on Canadian, Mexican, and Chinese imports, prompting retaliatory measures. The Federal Reserve highlighted concerns about the inflationary impact of tariffs and indicated a need for more progress on inflation before considering further rate cuts.

Europe:
Euro area inflation rose to 2.5% in January, led by increases in energy and food prices. The ECB cut interest rates by 25 basis points, marking its fifth cut, bringing the deposit facility rate to 2.75%. ECB President Christine Lagarde acknowledged weak economic growth but signaled continued monetary easing. Markets expect more rate cuts from the ECB than from the Fed, given the differing inflation dynamics.

Geopolitical Events

US-Ukraine tensions escalated as President Trump criticized Ukrainian leadership and pushed for a mineral revenue-sharing agreement as part of a US-Russia peace deal. The proposed agreement would grant the US a 50% stake in Ukraine’s mineral resources, raising concerns in Kyiv. Meanwhile, the start of US-Russian talks on the Ukraine conflict weighed on oil markets, with prices falling on expectations of eased supply constraints.

Market Trends
US stocks continued their upward trajectory, with the S&P 500 reaching an all-time high of 6,144. Optimism surrounding Trump’s tariff pause on Canada and Mexico offset concerns over persistent inflation and a higher-for-longer Fed policy stance. Corporate earnings were mixed—megabanks posted strong Q4 results, while major tech firms saw volatility amid earnings misses and increased AI investments. Market sentiment remains positive in the near term, assuming Trump refrains from escalating tariffs further, though volatility is expected given policy unpredictability. In fixed income markets, declining U.S. Treasury and European bond yields reflected shifting expectations for central bank policy and a cautious risk environment.

Oil Crude prices declined sharply, with US oil down 11% to $71 per barrel and Brent down 8% to $75. US-Russia peace talks and trade tensions contributed to bearish sentiment. A potential relaxation of Russian oil sanctions could drive prices lower, while failed negotiations could trigger a rebound. Gold prices were largely flat, with inflation concerns and geopolitical risks offsetting pressure from a stronger dollar.

Currencies:
The U.S. dollar weakened against major currencies, driven by changing market expectations regarding U.S. interest rates, where as the Euro strengthened supported by better-than-expected economic data in the Eurozone.