Dear Investor

General Market Overview

The speeches and actions of the United States (US) Federal Reserve (the Fed) are closely analysed and watched, and the keynote address by Fed Chairman Jerome Powell on the 22^nd of August has been scrutinised by market analysts. The speech highlighted the Fed’s dual mandate of achieving maximum employment and maintaining price stability. It was noted as a dovish pivot signalling the Fed’s readiness to adjust policy amid shifting economic risks. 

Powell reiterated that monetary policy is “not on a preset course” and remains data-dependent, with the current policy rate “100 basis points closer to neutral than a year ago.” He announced revisions to the Fed’s framework, removing language about “shortfalls” in employment and allowing employment to run above real-time estimates of maximum levels without triggering immediate tightening. He added, “With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” strongly hinting at rate cuts. 

It was framed as potentially Powell’s “swan song” or legacy-setting moment, especially given the ongoing political pressures, including criticisms from President Trump regarding Fed independence and tariffs, which spurred immediate market optimism and cemented expectations for looser policy.

Also closely watched is the dynamic tariff landscape. Trump’s second administration has aggressively expanded its tariff policies, building on campaign promises to impose broad “reciprocal” tariffs on imports from numerous countries. The core framework originates from Executive Order 14257, issued in April 2025, which aims to regulate imports and address trade imbalances by matching or exceeding foreign tariffs on US goods. This framework has evolved into a sweeping system where tariffs are adjusted based on perceived unfair trade practices, trade deficits, and geopolitical leverage. By July 2025, tariffs were expected to account for approximately 5% of federal revenue, up from 2% previously, with average rates estimated at 18.6% across affected imports. The policy has generated significant revenue, potentially exceeding $500 billion annually, according to Treasury Secretary Scott Bessent; however, it has also sparked economic concerns and legal challenges.

The administration’s tariffs are tailored to specific countries, often framed as “reciprocal” responses to their trade policies, but sometimes tied to broader geopolitical goals. Two countries have record-high tariffs of 50% imposed, namely India and Brazil.

India’s tariff increased from 25% on the 6th of August. The official reason is to penalise India for continuing to purchase Russian oil, thereby isolating Moscow economically amid the Ukraine conflict. This reasoning aligns with broader efforts to curb Russia’s war funding. However, some reports allege the 50% tariff on India stems from Prime Minister Narendra Modi’s refusal to nominate Trump for the Nobel Peace Prize over his claimed role in an India-Pakistan ceasefire. Trump reportedly sought credit for brokering it, but Modi insisted it was handled directly between New Delhi and Islamabad.

Officially, the 50% tariff imposed on Brazil was declared in response to a US “national emergency” posed by Brazil’s government actions, specifically the prosecution and imprisonment of former President Jair Bolsonaro. The tariffs aim to address perceived threats to US interests and pressure Brazil’s judiciary. Critics frame the 50% tariffs as an attempt to interfere in Brazil’s sovereign judicial processes to protect Bolsonaro, who faces corruption charges and imprisonment. Some see this imposition on Brazil as Trump using economic leverage to “bend” Brazil’s judiciary, potentially violating international norms.

A significant development occurred on the 29th of August, when a federal appeals court ruled that most of Trump’s global tariffs are illegal, citing an overreach of executive emergency powers under the International Emergency Economic Powers Act (IEEPA). The court argued that Congress, not the president, holds primary authority over tariffs. However, enforcement of the ruling is delayed until mid-October 2025, allowing the administration time to appeal or adjust. This ruling could fundamentally reshape US trade policy if upheld, potentially limiting future executive actions on economic sanctions. 

Globally, tariff fears contributed to a massive spike in economic uncertainty. However, while uncertainty remains high, there are signs of easing. The uncertainty index is a blend of newspaper coverage, i.e., the frequency of articles in major newspapers, tax code expiration data, and economic forecaster disagreement, which together provide a sense of the prevailing sentiment.

It is interesting to observe the role of the “free market.” Companies have a strong economic incentive to avoid tariffs and embrace creativity in doing so. Some methods are perfectly legal, such as tariff splitting; others are potentially questionable, like transshipping; and there are also fraudulent misclassifications of goods. 

Transshipping refers to the practice of rerouting goods through an intermediate or third country during transit, often to change the apparent country of origin and thereby evade tariffs or trade restrictions imposed on the original exporting country. Both Vietnam and Mexico have been accused of this, given the surge in exports to the US from those two countries, goods which have likely originated in China.

Some evidence that tensions are diminishing or that companies are finding “workarounds” can be seen in the Eurozone Flash Purchasing Managers Index (PMI). Eurozone new orders increased for the first time in 15 months, as did business activity, and companies have increased their staffing levels.

In both Japan and the United Kingdom (UK), consumer confidence increased in July. In Japan, consumer confidence was supported by wage growth, while in the UK, it was fuelled by the Monetary Policy Committee’s decrease in interest rates to 4%, the lowest since March 2023. 

Consumer confidence indicators are often considered “leading” because they predict changes in consumer spending, which drives a significant portion of Gross Domestic Product (GDP). Consumer spending accounts for approximately 60% of GDP in the Eurozone and the UK, and around half of Japan’s GDP. 

General Conclusion

Over the quarter, multiple factors have influenced markets, including monetary policy shifts, persistent trade tensions, and emerging signs of economic adaptation. The Fed’s dovish pivot sets the stage for potential rate cuts that could drive investment and consumer spending over the remainder of 2025. 

The easing of uncertainty and improved consumer confidence in some markets suggests more economic and financial market resilience that perhaps thought – the market always finds a way - point to a potential soft landing globally, even as tariff fears linger. Moreover, as the Fed's framework evolves to tolerate higher employment without hasty tightening, equity markets may see sustained rallies, rewarding longer-term investors.