JUNE 2025
The global economy looks like it’s just been hit by a mini-pandemic.
The chart below shows the Philadelphia Fed New Orders index; a monthly survey of manufacturing activity in the Mid-Atlantic region. It offers early insights into broader US growth trends and global trade momentum.
It fell sharply in April in the immediate aftermath of the “Liberation Day” tariffs, but has rebounded strongly since.
In general, such volatility is not good for the economy; businesses find it hard to plan and commit resource against a backdrop of such extreme uncertainty.
However, the recent pandemic experience should help firms to navigate the trade war.
As the chart below shows, it was only five years ago when a similar, more pronounced trend was taking place with the sudden lockdown of the global economy making way for a V-shaped recovery as supply chains reopened.
Management teams will be drawing on the pandemic experience to shape their response to President Trump’s tariff flip-flopping.
Economic activity has been “Covid-like” this year with most growth indicators slumping in response to the initial US tariff announcements, before staging an impressive rebound in recent weeks.
The same is true of the stock market.
2020 ultimately produced stellar returns for equity investors with the FTSE All-World index generating a total annual return of 17% (U$ terms), but it fell by over 30% peak-to-trough in the first half of the year. See blue line below.
We have seen shades of a repeat during the first half of 2025 (red line).
The same index tumbled by 16% (U$ terms) during the closing stages of the first quarter, but has since recouped most of those losses.
In charting terms, once an index retraces more than half if losses, the probability of there being a sustained downturn reduces significantly.
We can thus draw comfort from the fact the global stock market has already sailed through that threshold and is back into positive territory for the year-to-date.
How the bond market reacts to the Trump administration’s U-turn on fiscal discipline will be key.
Higher long-dated borrowing costs are now likely as the “vigilantes” price out a more creditworthy US government. In turn, that would create a headwind for economic growth and risk assets.
However, the pace of any change in bond yields is what really matters.
The MOVE index is a widely followed measure of implied volatility in the US Treasury market. Think of it as the equity VIX index, but for bonds.
When the MOVE index spikes, it suggests bond markets are moving in a disorderly way.
The chart below shows that threat currently appears limited; the MOVE reading has compressed despite the recent pick up in Treasury yields.
That may well change should bond yields rise more aggressively to price in higher budget deficits and even more government borrowing.
But we also know that policymakers have little tolerance for bond market unrest.
And that any sudden increase in the MOVE index to around the 140 level is typically met with bundles of Central Bank and/or Treasury liquidity support.
Long-dated bond yields have trended higher in recent weeks, ever since the Trump administration began to waiver on its deficit reduction plans.
The 10yr Treasury yield is now trading well above 4% and is approaching its multi-year high around 5%. This is all in response to the massive, unfunded tax cuts included in the Republican’s budget plan and the fact the DOGE initiative has underwhelmed.
The bond market’s reaction could ultimately be problematic for equity investors.
Per the chart below, every major stock market sell-off of the past 50 years has been preceded by a sudden spike in 10yr US Treasury yields.
Encouragingly, the recent bond market weakness has been orderly (unlike in 2021/22), which reduces the immediate impact on equity prices.
Furthermore, history suggests the policymakers will soon intervene (to cap yields) should any bond sell-off become unruly.
The trillions of dollars of sovereign debt that needs to be refinanced this year remains a strong incentive for them to do so.
The content of this communication is for information purposes only. Bentley Reid believes that, at the time of publication, the views expressed and opinions given are correct but cannot guarantee replication of depicted performance. Viewers intending to take action based upon the content of this communication should first consult with the professional who advises them on their financial affairs. Capital invested will be at risk, and you may get back less than you invest. The past is not a reliable indicator of future performance. Neither the publisher nor any of its subsidiaries or connected parties accepts responsibility for any direct or indirect loss suffered by a recipient as a result of any action or inaction, in reliance upon the content of this communication.
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