Investment environment overview, 05/2025

Following the chaos of April’s “Liberation Week” tariffs and subsequent snapback rally, May proved to be more balanced for global equity markets. Investors displayed cautious optimism amid early signs that the global economy might avoid a hard landing, though sentiment remained tempered. The S&P 500 and Nasdaq Composite posted their strongest monthly gains since November 2023, rising 6.2% and 9.6%, respectively. The Nasdaq was lifted by continued strength in AI and tech stocks, led by Nvidia. Broader market gains were driven by continued strong tech earnings, somewhat easing trade tensions, and signs of moderating inflation. In Europe, the STOXX 600 posted a gain of 4.0%, while DAX posted a 6.7% gain despite soft manufacturing output and surging Euro. Chinese equities remained more muted as investor confidence remained fragile amid persistent property sector stress, uneven recovery data, and no real material progress on trade negotiations with the U.S., but still posted gains. The Shanghai Composite gained 2.1% and the CSI 300 added 1.9%

On May 22, Bitcoin hit a new all-time high of nearly USD 112,000, rising 9.4% MoM. The rally was fueled by strong interest from institutional investors, growing concerns about U.S. government debt, record-breaking inflows into Bitcoin ETFs, and supportive regulatory developments in the United States.

Tariff update

On May 12, the United States and China agreed to a 90-day tariff reduction deal, marking a temporary thaw in trade tensions. Under the agreement, U.S. tariffs on Chinese goods were cut from 145% to approximately 30%, while China reduced its retaliatory levies from 125% to 10%. Additionally, China pledged to gradually ease export controls on critical minerals. The announcement sparked optimism, with the S&P 500 jumping 3.3% that day. However, the relief was short-lived. On May 30, Trump accused China of deliberately delaying the issuance of mineral export licenses, reviving fears of a renewed trade conflict. That same day, Trump announced a major escalation in trade measures, doubling tariffs on imported steel and aluminum from 25% to 50%, effective June 4.

The decision followed a Federal court ruling challenging the legality of some of Trump’s tariffs, citing executive overreach, although the Appeals court temporarily reinstated the tariffs pending further review. The EU has already pledged to respond to the new tariffs on metals.

On June 2, China accused the U.S. of failing to uphold its end of the tariff agreement by introducing new guidelines on AI chip export controls, limits on chip design software sales to Chinese companies, and the revocation of Chinese student visas, particularly in STEM-related (science, technology, engineering and mathematics) fields.

Japan at a fiscal crossroads

Japan’s fiscal situation is becoming increasingly precarious as public debt currently stands at approximately 250% of GDP – the highest among advanced economies. Despite a modest decline from the 261% peak in 2020 due to economic recovery and negative real rates, the debt remains unsustainable, with decades of persistent fiscal deficits, an aging population, and rising social security costs driving the debt burden higher.

Japan now has one of the most rapidly aging populations in the world, with a third of its citizens over the age of 65. At the same time, the country continues to experience one of the lowest birth rates globally, leading to a shrinking workforce and increasing dependency ratios. In 2024, the primary fiscal deficit reached 6.4% of GDP, with further spending increases expected in 2025 for defense, social needs, and industrial policy.

Prime Minister Shigeru Ishiba, who came to power as a critic of “Abenomics”— the previous policy of aggressive monetary easing and large-scale government bond purchases by the BoJ — recently stated that Japan’s fiscal situation is “undoubtedly extremely poor — worse than Greece’s.” His comments come as Japan’s economic outlook continues to deteriorate. The country’s GDP shrank by 0.2% during Q1 2025, and borrowing costs are rising sharply. On May 22, yields on Japan’s 40-year government bonds reached a record high of 3.69%, while 30-year bond yields rose to 3.19%, levels not seen in two decades.

Despite these challenges, Japan has so far avoided a full-blown debt crisis, mainly because 86% of its government debt is held domestically, and the average maturity is over nine years. This makes it less vulnerable to sudden capital flight compared to countries like Greece, which faced a severe debt crisis in the past because most of its debt was held by foreign investors. However, without meaningful fiscal reforms Japan’s growing debt burden remains unsustainable over the long term.

U.S. debt concerns mount

The Eurozone’s manufacturing continued its slowdown over the month and the services sector returned to contraction for the first time since November 2024, with the PMI falling to 48.9 from 50.1 in April. Inflation in the Eurozone has slowed down and is now at 1.9% YoY, which is just below the ECB’s target of 2%. Thus, the ECB decided to lower its key interest rates by 25 basis points on 5 June, bringing the deposit rate to 2.00%, and the repo rate to 2.15%.

The U.S.’ manufacturing sector also continued to contract over the month, with the ISM PMI declining to 48.5 in May from 48.7 in April. The services sector unexpectedly crossed into contraction territory, with the ISM PMI declining to 49.9 compared to 51.6 in April. On May 16, Moody’s downgraded the U.S. sovereign credit rating from Aaa to Aa1. The decision was driven by concerns over the U.S.’ ever-increasing USD 36t debt, persistent fiscal deficits and rising interest payments. Moody’s highlighted that successive administrations have failed to implement measures to reverse these trends, projecting that federal debt could reach 134% of GDP by 2035, up from 98% in 2024.

Following Moody’s downgrade, the 30-year Treasury yield briefly spiked above 5%, reaching a peak of around 5.03% – its highest level since November 2023. However, Treasury markets later stabilized, and yields eased back slightly.

Dollar holds support, while oil defies bears

The EUR/USD pair dipped into the anticipated 1.1150–1.1200 support zone, briefly touching 1.1075 before rebounding. This reinforces the importance of the broader 1.1000 level as a medium-term pivot. As long as EUR/USD weekly closes are above 1.1000, the outlook favors Euro strength. We tactically prefer buying dips near 1.1200, with 1.1550 being our next key resistance. A sustained move below 1.1200 would be an early warning for the bulls, and a weekly close under 1.1000 would negate the bullish bias.

In precious metals, gold pulled back in May and is currently trading at XAU/USD 3,350, while silver and platinum showed relative strength. This divergence aligns with gold’s elevated valuation versus the other two. We continue scaling back gold exposure on strength and favor accumulating platinum.

Oil defied bearish sentiment in May, rebounding despite broad calls for lower prices. While a break below USD 58 could trigger a deeper drop toward USD 45, price action remains inconclusive. A move above USD 68 would signal renewed bullish momentum. Until then, we expect crude to trade within a USD/bbl. 60–68 range, with potential for a directional breakout once these boundaries are breached.

Regional Highlights

During the month, the OMX Baltic Benchmark Index rose by 5.33%. Bond issuance activity in May was robust across the Baltic States, with issuances from IuteCredit, Rīgas Ūdens, Eesti Energia, Altum, AEI, and Invego. Invego stood out with its EUR 8m secured bond issue by attracting overwhelming interest — its EUR 4m base subscription was nearly four times oversubscribed, drawing 2,038 investors and EUR 15.8m in demand.

Meanwhile, GDP results for Baltic States for Q1 2025 have been published. Latvia remained in recession for a fourth consecutive quarter, with GDP contracting by 0.3% due to weak household consumption, a negative trade balance and external uncertainties, despite strong investment and government spending. Estonia’s GDP also contracted by 0.3% as strength in high-value sectors like ICT and healthcare was offset by weak investment in housing and transportation, along with uneven export performance. In major contrast, Lithuania’s GDP grew by 0.4%, driven by robust fixed investment and rising wages, though private consumption slowed and imports outpaced exports.