Muzinich Weekly Market Comment: Markets keep cool as political heat rises

August 11, 2025

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In our latest roundup of the key developments in financial markets and economies, we explore why steady gains in risk assets mask continued tariff noise, sanction threats and policy uncertainty.

Markets last week were a study in contrasts. Credit investors booked decent gains, equity markets staged a relief rally, and oil took a sharp tumble, all while geopolitics and trade policy moved in ways that could still upset the calm. Beneath the headlines, there was a theme worth noting: despite the noise of tariffs, sanction threats and political theatre, money continues to flow into fixed income at a pace reminiscent of a late-cycle bid for safety than a vote of confidence in risk.

High yield returns were positive across the board, with the US leading and emerging markets close behind. Investment grade credit, while less stellar, was still in positive territory, with Europe outperforming emerging markets and the US.

Government bond yields remained rangebound in Europe. US Treasury yields ticked up, a modest widening after the prior week’s rally. In the UK, short-dated gilt yields rose after the Bank of England’s rate cut, a reminder that even when policy easing is delivered, the market’s interpretation is rarely straightforward.

The steady tone in credit was notable given the week’s geopolitical developments. For now, investors seem to be relying on carry and selective risk-taking, confident that corporate balance sheets remain resilient enough to weather external shocks.

Equities also rallied after the previous week’s stumble on weak payrolls. US stocks rose around 2%, with earnings doing the heavy lifting. In Europe, French equities gained 2%, Germany 3%, while Japan bucked the trend of generally lower Asian bourses by posting a gain of over 4%, which some reports partly attributed to the US agreeing to fix an “extremely regrettable” oversight on the application of tariffs to Japanese exports.^[1]

Oil’s 6% fall last week was a reminder that commodity markets, unlike equities, can still respond sharply to fundamentals. The decision by eight OPEC+ members to add 547,000 barrels per day next month was couched in the language of “market stability,” but traders took it as a signal that supply discipline could fray in the face of fiscal pressures. If energy prices remain under pressure, it could offer some relief to inflation, although tariff pressures and geopolitical risk could mean any such benefit is fragile.^[2]

Misses matter more than hits

US Q2 earnings season have so far revealed that investors have little patience for failure. With two-thirds of the S&P 500 reported, 82% have beaten earnings per share (EPS) estimates, above long-term averages. The magnitude of the beats is respectable (8% above expectations), but the market’s reaction is asymmetrical: positive surprises bring only a 0.9% average share price gain, while misses cost 5.6% on average.^[3]

In Europe, Q2 earnings for the STOXX 600 are projected to rise 3.1% year-on-year, or 6.4% excluding energy. Technology leads with 26% growth, while consumer cyclicals lag with a 31% decline. Revenues are weaker, down 2% overall or flat excluding energy. Beat rates are in line with history for EPS but well below for revenue. The divergence between sector winners and losers remains stark, reflecting differences in pricing power and exposure to global demand.^[4]

In credit

One of the more telling statistics of last week was not a price move, but a flow number. US bond funds pulled in US$8.4 billion in the week to July 30, capping a July total of US$33.7 billion. Equity funds, by contrast, saw US$374.6 billion of outflows, which seems counterintuitive given still lofty valuations. Money market funds, far from losing to risk assets, have gained almost US$200 billion since the US administration’s Liberation Day tariff announcement in early April.^[5]

The typical post-rate cut playbook — a rotation from cash to equities — is not playing out. Instead, investors are parking more in cash products or switching to bonds, suggesting either lingering caution or a conviction that yields offer adequate compensation with less drawdown risk than equities.

Split decision

The Bank of England’s quarter-point rate cut to 4% was a close-run thing, passed by a 5–4 vote.^[6] The case for easing was straightforward: inflationary pressures are easing, albeit unevenly; economic growth is anaemic; and the labour market is showing signs of slack.

But Governor Andrew Bailey’s language was anything but a green light for further cuts. He stressed the risk of “cutting too quickly or by too much,” with CPI still expected to tick up to 4% in September before receding. One member of the Bank’s monetary policy committee initially wanted a 0.5% cut but compromised to break a deadlock, a reminder that policy remains on a knife-edge.

US productivity gains, but price pressure persists

The US labour market continues to drift rather than lurch towards weakness. Initial claims rose by 7,000 to 226,000, the highest level since late 2021.^[7] Whilst this does not indicate evidence of sharp slowdown, it also does not suggest an economy firing on all cylinders.

Productivity data was more encouraging: nonfarm productivity rose 2.4% in Q2, output grew 3.7%, and hours worked climbed 1.3%. Real hourly compensation rose 2.3%, comfortably outpacing inflation. Manufacturing productivity delivered its strongest annual gain since 2021.^[8] Against that, Q1 revisions were less flattering, with productivity marked down and unit labour costs revised up.

Services, however, remain a pressure point. The ISM Services PMI slipped to 50.1 — barely above contraction — with employment shrinking again and the price index leaping to its highest since October 2022.^[9] Tariff tensions were visible in falling export and import orders. The combination of modest growth, persistent cost pressures and weaker hiring is an awkward one for policymakers: it argues neither for complacency on inflation or for aggressive easing.

Deadlines and red lines

The Russia–Ukraine conflict was back in the diplomatic spotlight. US special envoy Steve Witkoff’s three-hour meeting with Vladimir Putin came days before a White House deadline: commit to peace with Ukraine by Friday or face sanctions, including secondary measures against countries buying Russian energy.^[10]

The idea of a Trump–Putin–Zelenskyy summit was floated, but in the end Trump announced on Friday via his Truth Social account that he will meet with Putin alone, in Alaska on August 15. Earlier in the day, Trump had said any peace deal could include “some swapping of territories”, a claim quickly dismissed by Zelensky, who said Ukraine “will not give their land to the occupier”.^[11]

On trade, the US continues to ramp up pressure on major partners. The average US tariff rate is heading to 15.2%, up from 2.3% in 2024 to a level not seen since World War II. Switzerland failed to secure a cut to its 39% duty; India, meanwhile, could see tariffs on its exports to the US double to 50% later this month as a punishment over its Russian oil purchases. If the US makes good on its threat, it could cause serious damage to the Indian economy given the US accounts for 18% of India’s exports.^[12]

Failing to agree a deal could certainly make the next meeting of the Quad – a security alliance consisting of Australia, India, Japan and the US – more interesting. India is due to be hosting the next summit in September or October, with press reports suggesting it could even be cancelled given current US-India hostilities.^[13]

Meanwhile, the semiconductor sector faces its own cliff edge, with a proposed 100% tariff on imports unless production is relocated to the US, although Asian producers with US investment plans are set to be exempt.^[14]

China, meanwhile, delivered an upside surprise in July exports, up 7.2% year-on-year to US$321.8 billion, driven by surging sales to Africa, the EU, Latin America and Southeast Asia. Shipments to the US fell more than 21%, underscoring the structural shift underway in China’s trade relationships.^[15] Analysts warn the recent uptick in exports could prove fleeting, given base effects and the looming prospect of new trade barriers.

Chair in waiting

President Trump’s running commentary on the Federal Reserve continued, with Treasury Secretary Scott Bessent ruled out of the race to replace Jerome Powell. The frontrunner is now Christopher Waller, with Kevin Warsh and Kevin Hassett also in the frame.^[16]

The personnel shifts matter less for the short-term path for policy rates, which markets still see as moving lower, than for the question of institutional independence. Trump’s repeated public criticism of Powell, calling him “too late” and “a numbskull”, among other insults, keeps alive the possibility of a Fed leadership transition aligned with the administration’s more activist economic stance.

Big picture

If there is a unifying thread from last week, it is that markets are still processing, rather than fully discounting, the policy and political risks ahead.

Credit remains stable due to elevated all-in yields and sound corporate fundamentals. Equities can still rally for now on positive earnings results, but as economic data increasingly starts to reflect the full impact of US tariffs, how long the market stays in ‘risk-on’ mode is up for debate.

 

References

[1] Financial Times, ‘Japan says US to amend ‘regrettable’ tariff deal inconsistency,’ August 8, 2025
[2] OPEC+, ‘Saudi Arabia, Russia, Iraq, UAE, Kuwait, Kazakhstan, Algeria, and Oman reaffirm commitment to market stability,’ August 3, 2025
[3] FactSet, ‘Market Is Punishing Negative EPS Surprises More Than Average for Q2,’ August 5, 2025
[4] LSEG, ‘STOXX 600 Earnings Outlook 25Q2,’ August 5, 2025
[5] Investment Company Institute, ‘ICI Reports Estimated Long-Term Mutual Fund Flows,’ August 6, 2025
[6] Bank of England, ‘Bank Rate reduced to 4%,’ August 7, 2025
[7] US Department of Labor, ‘Unemployment Insurance Weekly Claims,’ August 7, 2025
[8] US Bureau of Labor Statistics, ‘Productivity and Costs, Q2 2025,’ August 7, 2025
[9] Institute for Supply Management, ‘July 2025 Services ISM Report on Business,’ August 6, 2025
[10] CNN, ‘Witkoff meets with Putin as Trump’s sanctions threat looms,’ August 6, 2025
[11] CNN, ‘Trump says he’ll meet Putin in Alaska next week,’ August 8, 2025
[12] Bloomberg, ‘Trump’s Tariffs Take Effect in Fresh Test for Global Economy,’ August 7, 2025
[13] Australian Financial Review, ‘India-US oil spat could delay Albanese-Trump meeting,’ August 7, 2025
[14] Bloomberg, ‘Trump Eyes 100% Chips Tariff, Exempting Firms That Invest in US,’ August 7, 2025
[15] South China Morning Post, ‘China’s exports defy trade war headwinds in July as growth surges to 7.2%,’ August 7, 2025
[16] CNN, ‘Trump says Scott Bessent no longer in the running for Fed chair,’ August  5

 

Past performance is not a reliable indicator of current or future results.

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of August 11, 2025, and may change without notice. All data figures are from Bloomberg, as of August 8, 2025, unless otherwise stated.

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