July Extended Market Update

Reuben Whitby-Samways
Jul 31
9 min read

July’s markets delivered a mix of resilience and turbulence, as optimism over a relatively steady global growth from the past few months was tempered by mounting trade frictions. Japanese equities, which had been riding strong first-half momentum, reversed course sharply in the final week after the U.S. announced steep new tariffs on key exports. The resulting profit downgrades from major automakers and chipmakers sparked a sell-off that echoed across Asia. Meanwhile, U.S. economic data showed early signs of cooling, prompting shifts in currency markets and a rotation in global capital flows. For the diverse investors, July delivered healthy gains in equities and stable conditions in other asset classes, However Japan’s last-minute volatility was a reminder that political and trade risks can quickly dent an otherwise strong month.

Drivers of Market Volatility in July.

Easing U.S. Japan Trade Tensions

Early-month optimism on tariffs and trade policy boosted Japanese equities and investor confidence globally.

Strong Corporate earnings

Better-than-expected results, especially from tech and export-driven companies, supported equity gains in Japan, the U.S., and Europe.

Late-month profit warnings and tariff concerns

Automakers and major exporters in Japan issued profit downgrades, while renewed trade uncertainty triggered sell-offs, particularly in Japanese equities

Macro signals and central bank expectations

Mixed economic data, including signs of cooling inflation and growth moderation, affected interest rate expectations, driving volatility in equities, bonds, and currencies.

UK Market Review.

July 2025 was a month of notable developments in the UK financial landscape, marked by significant movements in key economic indicators and financial markets. The FTSE 100 reached a historic high, surpassing 9,000 points for the first time, driven by investor optimism and expectations of future interest rate cuts. However, the Bank of England's decision to reduce the base rate to 4% was met with a narrow 5-4 vote, reflecting internal divisions and ongoing concerns about inflation.

UK inflation remained sticky in July, with CPI holding at 3.6% year-on-year, still well above the Bank of England’s 2% target. Core inflation (CPIH) eased only slightly to around 4.1–4.2%, driven by persistent food, energy, and transport costs. This persistent inflationary pressure has led to cautious expectations regarding further rate cuts, with some economists predicting no additional reductions until 2026.

Economic activity showed a more positive trend: while July’s GDP data is not yet available, June’s monthly growth came in at +0.4%, lifting Q2 GDP to +0.3%. Services and construction remained the primary drivers, offsetting a modest dip in production. The IMF upgraded its 2025 UK growth forecast to 1.2%, while the OECD projected 1.3%, reflecting a resilient yet cautious outlook.

In July, the UK’s various asset classes delivered a mixed picture. Equities held firm, with the FTSE 100 ending the month up around 1.2%, supported by gains in energy and utilities, while the more domestically focused FTSE 250 slipped 0.4% amid softer growth data. Sterling weakened by about 0.8% against the US dollar and 0.5% against the euro, reflecting expectations that the Bank of England would delay further rate cuts until early 2026. Meanwhile, Brent crude, a key driver for UK energy stocks, averaged 85 dollars per barrel, providing a tailwind for the sector.

What caused the changes in the market?.

The surge in national debt

The market in July was unsettled by growing concerns over the UK’s public debt. June’s borrowing figures were up to 20.7 billion pounds, highlighting the government’s rising debt burden, pushing the debt-to-GDP ratio to 96.3%. This reinforced investor worries about fiscal sustainability and higher future borrowing costs, creating ripple effects into July’s markets.

As a result, gilts came under pressure, with 10-year yields rising to around 4.6% as investors demanded higher compensation for holding government debt. Sterling weakened against both the US dollar and the euro, reflecting heightened uncertainty over fiscal policy and the Bank of England’s limited flexibility to cut rates. Equities were mixed: the FTSE 100 benefited from energy and defensive sectors, but domestic-focused stocks, particularly in the FTSE 250, were more sensitive to potential economic slowdown and fiscal constraints.

Decrease in Interest rates

Interest rates played a key role in shaping UK markets in July. With inflation remaining at 3.6%—above the Bank of England’s 2% target—but growth softening, the BoE decided to deduct 25 basis points of interest to reach a rate at 4%.

Bond Markets

Gilts came under pressure, with 10-year yields rising to around 4.6% as investors priced in higher borrowing costs and reduced expectations of rate cuts.

Equities

The FTSE 100 benefited from stability in interest rates, particularly in defensive and energy sectors, while domestically sensitive stocks in the FTSE 250 were more muted due to concerns about slower growth.

Currency

Sterling weakened slightly against the dollar and euro, as markets had hoped for earlier rate cuts to stimulate growth, but instead faced a prolonged high-rate environment.

U.S Market Review.

Inflation remained steady at 2.7% year-over-year in July, slightly below expectations. Core inflation, which excludes food and energy, rose to 3.1%, driven by increases in shelter, medical care, and motor vehicle insurance. Despite these pressures, the Federal Reserve held the federal funds rate at 4.25%–4.5% during its July meeting, citing ongoing inflation concerns and a need for further data on economic growth.

The S&P 500 rose 2.2% in July, extending its summer rally and reaching multiple record highs. This marked the third consecutive monthly gain, following increases of over 5% in both May and June.

Bond markets reflected investor expectations of future interest rate movements. The yield on the 10-year U.S. Treasury note remained relatively stable, hovering around 4.6%, as market participants balanced concerns over inflation with hopes for future rate cuts. The bond market's performance indicated a cautious outlook, with investors seeking safe-haven assets amid economic uncertainties.

The U.S. dollar experienced modest fluctuations in July. Against the Canadian dollar, the average exchange rate was approximately 1 USD = 1.3688 CAD, with a peak at 1.3859 CAD. These movements were influenced by varying economic data and investor sentiment regarding U.S. monetary policy and global trade dynamics.

In July 2025, U.S. markets saw mixed performances across key asset classes. Equities led the gains, with the S&P 500 rising 2.2% for the month, driven by strong earnings in technology and energy sectors and bringing year-to-date returns to 7.8%. In fixed income, bond yields increased, with the 10-year U.S. Commodities showing varied movements: oil prices averaged $85 per barrel amid strong demand, gold remained stable and industrial metals softened slightly due to trade concerns.

What caused the changes in the market?.

Economic Data - Inflation

In July 2025, inflation influenced U.S. markets by keeping the Federal Reserve cautious on rate cuts. Headline CPI rose 0.2% month-on-month (2.7% year-on-year), and core CPI increased 0.3% to 3.1% annually. This pushed the 10-year Treasury yield to 4.6% and kept equities moderately volatile, despite strong tech and energy earnings.

Economic Growth Momentum

The strong economic momentum in July 2025 supported equities, particularly in sectors tied to consumer spending and business investment, driving the S&P 500 up 2.2% for the month. At the same time, robust growth reinforced cautious expectations for Federal Reserve rate cuts, keeping bond yields elevated and contributing to moderate volatility in fixed income markets.

Federal Reserve Policy and Interest Rates

The Fed held the federal funds rate at 4.25–4.5% in July 2025, signalling caution on further rate cuts. This contributed to a rise in the 10-year U.S. Treasury yield to 4.6% and kept investment-grade corporate bond yields around 4.2%, influencing borrowing costs and investor allocations across equities and fixed income.

Corporate Earnings and Sector Performance

Strong earnings reports lifted equities, particularly in technology and energy. The S&P 500 rose 2.2% in July, with tech companies like Apple and Microsoft reporting revenue growth of 5–7% year-on-year, while energy firms benefited from Brent crude averaging $85 per barrel, supporting sector gains despite persistent inflation and global trade concerns.

Eurozone Market Review.

The Eurozone’s GDP expanded 0.1% quarter-on-quarter in Q2 2025, down from 0.6% in Q1, with year-on-year growth at 1.4%. Growth was supported by domestic demand, particularly in the consumer and services sectors, while industrial output remained sluggish in major economies like France and Italy. The modest expansion highlighted a cautious recovery, with the region showing resilience despite slowing exports and global uncertainties.

Annual inflation in the Eurozone held steady at 2.0% in July 2025, while core inflation, excluding energy and food, was 2.3%. Price pressures persisted in services and housing, keeping the European Central Bank cautious on monetary policy. Energy costs remained a key driver, with fluctuations in oil prices impacting both corporate costs and consumer spending.

Yields on 10-year Eurozone government bonds rose to 3.20% by mid-August, indicating expectations of prolonged low interest rates. Equities posted modest gains, with the EU50 index reaching 5,404 points. Energy and consumer discretionary stocks led performance, while banks and industrials lagged amid slower growth expectations and rising borrowing costs.

In July 2025, the European Central Bank held key interest rates steady, keeping the main refinancing rate at 2.15%, the deposit facility at 2.0%, and the marginal lending rate at 2.4%. This pause followed eight rate cuts since June 2024, totaling 200 basis points, aimed at supporting growth and controlling inflation. The ECB emphasized a cautious, data-driven approach to ensure inflation stabilizes near its 2% medium-term target. Markets expect rates to remain steady for the remainder of 2025, with a potential cut in early 2026 influenced by fiscal stimulus in Germany and structural inflation factors.

What caused the changes in the market?.

Economic Growth - Slower Expansion

The Eurozone's GDP grew by just 0.1% quarter-on-quarter in Q2 2025, a significant slowdown from 0.6% in Q1. This deceleration, driven by contractions in Germany and Italy, led to cautious investor sentiment. Consequently, the STOXX Europe 600 Index experienced a modest decline of 0.5% in July, reflecting investor concerns over economic growth prospects.

Inflation stability

Inflation remained steady at 2.0% in July, aligning with the European Central Bank's target. This stability influenced the ECB's decision to maintain interest rates, impacting bond markets and investor expectations. The yield on 10-year German Bunds held steady at approximately 3.2%, indicating stable inflation expectations and monetary policy outlook.

Bond Yields: Rising Expectations

The yield on 10-year Eurozone government bonds rose to 3.20% by mid-August, reflecting investor expectations of prolonged low interest rates amid mixed economic signals. This uptick affected fixed-income investments and borrowing costs, with investors adjusting portfolios in response to changing yield curves.

In July 2025, Germany's €500 billion fiscal stimulus package, focusing on defense and infrastructure, significantly impacted financial markets. The German government relaxed its "debt brake" rule, allowing for increased borrowing to fund these initiatives. This policy shift led to a rise in long-term bond yields, with the 30-year German government bond yield reaching 3.31%, its highest level since 2011. The increased borrowing requirements raised concerns about higher debt levels, influencing investor sentiment. However, the stimulus measures were expected to boost economic growth, potentially offsetting some of these concerns. The DAX index, Germany's benchmark stock market index, experienced a surge of 3.6% following the announcement of the fiscal stimulus, indicating a positive investor reaction to the government's plans.

Japan Market Review.

The Nikkei 225 index surged to an all-time high, surpassing 43,000 points for the first time, driven by robust performance in technology and export-oriented sectors. This rally extended over six consecutive sessions.

Japan's GDP grew by 0.6% quarter-on-quarter in Q2 2025, marking a recovery from the previous quarter's contraction. This growth was supported by resilient domestic demand and a slight recovery in external demand, helping Japan avoid a technical recession.

The 10-year Japanese Government Bond yield rose to 1.6% in July, its highest level since October 2008, amid concerns over increased fiscal spending and potential political instability. This uptick in yields reflects investor apprehension about Japan's fiscal health and the impact of upcoming elections on monetary policy.

What caused the changes in the market?.

Strong increase in Revenue growth for companies

In July 2025, the Nikkei 225 rose by approximately 5.2% month-on-month. This increase was largely driven by strong corporate earnings: tech companies like Sony and Toyota reported revenue growth of 8–10% year-on-year. Export demand also surged, with Japanese shipments to the U.S. and China up 6% and 4% respectively. This combination of higher profits and global demand drove investor confidence, pushing equities higher and increasing market liquidity.

Modest GDP Growth

Japan’s GDP grew by 0.6% quarter-on-quarter in Q2 2025, recovering from a -0.2% contraction in Q1. Domestic consumption increased 1.1%, particularly in retail and services, as households benefitted from wage growth of 2.5% year-on-year. The positive GDP figure reassured investors that economic momentum was returning, reducing risk premiums on equities and encouraging inflows into growth-oriented sectors.

Inflation Trends - Mixed Signals

Core inflation in Tokyo remained above the Bank of Japan's 2% target, with a 2.9% year-on-year increase in July. However, wholesale inflation showed signs of easing, with the Corporate Goods Price Index rising by 2.6% year-on-year, down from 2.9% in June. These mixed inflation signals influenced the Bank of Japan's monetary policy decisions and impacted market expectations.

Rising Bond Yields Amid Fiscal Concerns:

The yield on 10-year Japanese Government Bonds rose to 1.6% in July, its highest level since October 2008. This uptick in yields reflected investor apprehension about Japan's fiscal health and the impact of upcoming elections on monetary policy. The rising bond yields influenced investor sentiment and contributed to market volatility.

Overall, July 2025 demonstrated how quickly financial markets can shift as investors balanced resilient economic growth with evolving political, fiscal, and trade uncertainties. While strong corporate earnings and steady consumer activity supported equity performance across major regions, rising government borrowing, mixed inflation signals, and unexpected policy developments injected volatility into both bond and currency markets. The month’s developments ultimately reinforced a broader theme: even in periods of economic stability, global markets remain highly sensitive to policy direction and geopolitical risk. As investors look ahead, the trajectory of interest rates, fiscal strategies, and international trade relations will remain central to shaping market sentiment and asset performance.