The week that was …
Economic round-up
US rates decision
The Federal Reserve left US interest rates unchanged at 4.5% last week. The decision had the largest number of dissenting votes in just over three decades, however, with two members of the Federal Open Market Committee wanting to reduce rates by a quarter of a percentage point. Read more from Reuters here
Trump fires statistics chief
US president Donald Trump fired Erika McEntarfer, commissioner of the Bureau of Labor Statistics, after weak jobs figures. Trump claimed the Bureau had “rigged” the jobs figures “to make the Republicans, and me, look bad”. The economy added 73,000 jobs in July – significantly behind expectations of 110,000, and down from 147,000 last month. Read more from the BBC here
Eurozone inflation
Eurozone inflation held at 2% in July, marginally ahead of expectations. The reading hit the euro, with the currency having its worst week since 2022, but gives the European Central Bank some breathing space on interest rates. Read more from Euronews here
Germany economic weakness
Germany’s economy contracted by 0.1% in the second quarter of 2025, in line with forecasts. The economy was hit by weaker demand from the US and reversed the growth recorded in the first quarter. Read more from Reuters here
Eurozone GDP
Eurozone economic growth held up better than feared in the second quarter of 2025, suggesting businesses are adapting to trade uncertainty. GDP in the Eurozone expanded by 0.1%, quarter on quarter – marginally higher than expectations. Read more from Reuters here
US business sentiment
US manufacturing activity weakened in July, with the Purchasing Manager Index (PMI) falling from 49 to 48. Analysts had expected the reading to be 49.5. The employment index was also weak – falling from 45.0 in June to 43.5, which means that the sector’s payrolls are having some trouble. Read more from FX Street here
US inflation
The Federal Reserve’s preferred inflation indicator – the Personal Consumption Expenditures Price index –posted a stronger-than-expected increase in June, up 2.6%. Consensus forecasts from economists had the index rising 2.5%. Read more from Morningstar here
China business sentiment
China’s manufacturing PMI registered 49.3, missing expectations of 49.7 from a Reuters poll of economists. China’s official manufacturing PMI has been below the 50 mark – reflecting contraction rather than expansion – since April. Read more from CNBC here
Markets round-up
Dollar reverses mini-rally
The US dollar dropped on Friday and saw its biggest daily loss against the yen since January 2023, after data showed the US economy added fewer-than-expected jobs in July. Traders increased bets on how many times the Federal Reserve is likely to cut rates this year. Read more from Reuters here
Microsoft $4tn market cap
Microsoft hit a market capitalisation of $4tn as US technology stocks revived. Meta’s stock also lifted on the back of blockbuster earnings. The S&P 500, however, was pulled lower by pharmaceutical companies, whose share prices fell sharply on president Trump’s demand for lower drug prices. Read more from the FT here
Oil giants sell off
Oil producers Chevron and Exxon Mobil saw their share prices drop last week after weaker oil and gas prices led to slashed revenues. Trump’s tariffs policies have also added to fears about weakening economies and oil demand. Read more from Reuters here
Amazon weakness
Amazon’s share price weakened last week even though its second-quarter earnings exceeded Wall Street’s expectations. The company failed to quell worries over the impact of Trump’s sweeping tariffs on its e-commerce business. Read more from the Guardian here
“Smaller companies tend to be more domestic in focus and therefore less impacted by the tariff disruption that has weighed on large multinational businesses.
Selected equity and bond markets: 25/07/25 to 01/08/25
| Markets | 25/07/25 (Close) |
01/08/25 (Close) |
Gain/loss |
|---|---|---|---|
| FTSE All-Share | 4956 | 4919 | -0.7% |
| S&P500 | 6389 | 6238 | -2.4% |
| MSCI World | 4127 | 4023 | -2.5% |
| CNBC Magnificent Seven | 360 | 363 | -1.5% |
| US 10-year treasury (yield) | 4.39% | 4.23% | |
| UK 10-year gilt (yield) | 4.63% | 4.53% |
Investment round-up
Elston launches MPS
Elston Portfolio Management, a platform-based model portfolio services provider, has launched a range of sustainable model portfolios, comprising SDR-compliant funds. The group will offer five risk-rated, multi-asset portfolios with ongoing charges averaging 0.7%.
Maven VCT fight
Independent proxy adviser ISS has advised investors in Maven Renovar VCT to vote against the proposals put forward by a group of shareholders at the upcoming requisition meeting. The trust’s board has criticised the management of the VCT under Paul Jourdan, while the shareholder group has claimed their proposals have been kept from other shareholders by the board.
Halo Invest opens ‘Adviser Gateway’
Halo Invest has launched a new platform, aimed at targeting the advice gap. Advisers will be able to build a series of model portfolios for non-advised clients. The service is designed to help advisers meet the needs of clients with fewer assets.
IHT receipts rise
The total number of estates paying inheritance tax rose 13% in the tax year 2022/23 to 31,500. Advisers blamed frozen tax bands, which bring more people into the IHT net. The current IHT allowance has been frozen at £325,000 for 16 years.
IBOSS offers MPS calculator
IBOSS Asset Management has launched an MPS cost and risk profile calculator on its website. The comparison tool aims to provide clear and consistent cost data across model portfolio services.
FCA opens retail access to crypto ETNs
Firms will be able to offer retail consumers access to crypto exchange traded notes (ETNs), under changes announced by the Financial Conduct Authority. The Crypto ETNs must be traded on an FCA-approved, UK-based investment exchange and financial promotion rules will apply.
… and the week that will be
Earnings watch
Some three-fifths of S&P500 companies have now announced their second-quarter earnings but Caterpillar, Disney and McDonald’s are among those due to report this week. The US technology sector’s results have reassured investors about the artificial intelligence trade, while this week’s results should give an insight into the country’s manufacturing and consumer strength. Read more from Reuters here
US/China negotiations
The US’s 12 August tariff deadline for China is looming. Investors will be hoping to see the outcome of negotiations between Washington and Beijing this week and whether there will be another 90-day truce. The world’s two biggest economies may be shifting towards “indirect forms of negotiation” by strengthening partnerships with third countries that could reshape the global economic order, analysts have suggested. Read more from the South China Morning Post here
The week in numbers
UK interest rates: Consensus expectations are for the Bank of England to cut UK interest rates 25 basis points to 4% at its meeting on 7 August.
US business sentiment: Consensus forecasts have the US ISM services Purchasing Manager Index (PMI) rising to 51 in July, from 50.8 in June.
China business sentiment: Consensus expectations are for China’s Caixin services PMI to rise to 51 in July, up from 50.6 the previous month.
UK construction: The UK’s construction PMI is forecast to rise to 50 in July, up from 48.8 in June.
In focus: Small companies, high hopes
One of the big winners since Donald Trump’s self-styled ‘Liberation Day’ at the start of April has been global smaller companies. After a long period of weakness, the sector revived significantly in the second quarter and now tops the performance tables for the year to date. Even so, fund managers are suggesting valuations remain compelling and the smallcap revival has really only just begun.
Research from Aberdeen highlights the magnitude of outperformance from global smallcaps since Liberation Day, led by none other than the UK cohort. “The data shows the biggest difference in returns, since the start of April, was generated by the MSCI UK Smaller Cap index, which delivered cumulative returns of 12.7% over the period versus the MSCI UK index at 2.99% – a difference of 9.78% percentage points,” it notes.
“In Europe, the MSCI Europe Smallcap outperformed MSCI Europe GR by seven percentage points – up 9.88% versus 2.66% for large caps. In Asia, MSCI Asia ex Japan Small Cap returned 18.05% versus 12.70% from the MSCI Asia ex Japan Index, and MSCI Japan Small Cap returned 10.51% versus 7.27% from the MSCI Japan Index.”
Among active funds, the IA European Smaller Companies sector now tops the tables for the year to date with an average return of 17.9%. Funds in the IA North American Smaller Companies sector have delivered an impressive 14.9% return over the past three months alone, while the average UK Smaller Companies fund is up 10.7%. A similar picture can be seen with investment trusts, with the European Smaller Companies sector the top performing sector in the first half of 2025, according to data from the Association of Investment Companies, rising 24% in that time.
Aberdeen suggests the recent strength may be because smaller companies have been less impacted by recent macroeconomic turmoil in general – and tariffs in particular. Smaller companies tend to be more domestic in focus and therefore less impacted by the tariff disruption that has weighed on large multinational businesses.
Valuation and diversification may also have played a role. “Policy changes, and the knock-on effects to currencies and company earnings, are creating uncertainty in the US, at a time when US largecap is a widely owned asset class, and growth outside of the US is recovering,” says Kirsty Desson, manager on the Aberdeen Global Smaller Companies fund.
There has been little need to invest in the smallcap arena while the US technology sector was providing abundant growth, she adds, but the calculation has changed as the US dollar has declined and earnings prospects for smaller companies have improved.
The plans for increased defence spending across the EU and pro-growth reforms in a number of countries, including Germany, should support the economy and, in turn, smallcap stocks.”
Even after the recent rally, Desson points out, smaller companies are still trading at low valuations relative to large cap. “Investors can no longer ignore the valuation gap between small and large cap indices,” she continues. “Small companies are trading at the widest discount to large caps in more than 20 years.”
Against this backdrop, managers are generally upbeat about the outlook for smaller companies in the second half of the year. “We also see reasons why the improving European economic growth story could be sustained, which would support European smallcap stocks,” says Ollie Beckett, portfolio manager on the European equities team at Janus Henderson Investors.
“Many of the headwinds faced by European equities in recent years are turning into tailwinds. The inflation shock is largely dealt with – particularly in Europe, where inflation has continued to trend downwards – and interest rates have also been on a downward trajectory.
“The uncertainty caused by the threat from Russia and the shifting policies of the Trump administration could turn into a positive for the European economy, as it forces the region to unite in order to address inefficiencies and promote growth. The plans for increased defence spending across the EU and pro-growth reforms in a number of countries, including Germany, should support the economy and, in turn, smallcap stocks.”
Beckett also believes smaller companies have yet to benefit from lower interest rates since the start of the year, though this should start to become evident in earnings in the second half of the year.
We have been feeling huge conviction for a couple of years while the UK market has just got cheaper and cheaper. Now there are catalysts.”
It is a similar picture in the UK, although the smallcap rally took a pause in July as investors started to worry about the domestic economic outlook. “The UK market in small and midcap has been catastrophic for two and a half years, which talks to the opportunity because there are a lot of very cheap stocks,” says Richard Penny, manager of the TM Oberon UK Special Situations fund.
“We have been feeling huge conviction for a couple of years while the UK market has just got cheaper and cheaper. Now there are catalysts.” While UK smallcaps have seen a good run of performance in the short term, he adds that the economy is getting a little better and redemptions appear to be easing. Again, smaller companies should benefit from lower interest rates in the UK.
The risk, of course, is that any lurch down in the UK economy derails sentiment towards the country’s small and midcap stocks once again. While there appears to be no shortage of willing private equity and corporate buyers for the UK’s smaller companies, it would be a significant boost if domestic buyers were to return to the sector.
Across the Atlantic, meanwhile, North American smaller companies had a torrid time in the wake of Trump’s early presidency, but have seen a significant bounce-back as fears of a deterioration in the US economy have eased. “The US economy is a remarkable thing and fears of a sharp deterioration in ‘soft’ economic data feeding into hard data have been unfounded,” says Artemis US Smaller Companies fund co-manager Olivia Micklem.
“Looking forward, there are reasons to be optimistic on smaller companies in the US. They are relatively cheap, earnings are set to accelerate and they should benefit from a huge amount of domestic spending.” If Donald Trump pulls off even some of his ‘made in America’ ambitions, it should be good news for US small and midcaps. The sector may also benefit from deregulation – certainly, small business associations have welcomed the president’s ‘Big Beautiful Bill’ and its potential impact on the sector.
Investors have clearly started to diversify, looking beyond US technology to find better-priced sources of growth in global markets – and smaller companies are a natural hunting ground. They may be only in the foothills of their recovery.
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In focus: Eee-yuu trade deal
Despite its fearsome negotiating reputation, the Eurozone would appear to have come off second-best in its trade deal with the US. It has agreed to buy billions of dollars’ worth of American goods, while accepting higher tariffs on its own exports. What does this mean for the Eurozone’s economic outlook?
On the plus side, the deal does serve to mitigate some major risks for the bloc. The US will charge a 15% tariff rate on the vast majority of EU goods, which is lower than had been threatened. Certain industries – such as steel and aluminium – will still see tariffs of 50%, while a handful of sectors will be zero-rated. Key Eurozone industries such as autos, semiconductors and pharmaceuticals are subject to the 15% tariff, allaying fears of harsher treatment.
This is a better result for Eurozone industries than might have been expected, but the US has demanded a high price. The EU needs to buy $750bn (£649bn) worth of energy from the US, make $600bn of unspecified investments and buy its defence equipment. The EU also agreed not to retaliate on any trade measures.
“According to our modelling, the trade restrictions will likely weaken eurozone growth by around one percentage point over the next few quarters, bringing growth to a near halt during the second half of this year,” says Nicola Mai, head of European macro and sovereign analysis at Pimco.
“Around half of that impact is due to the direct effect of tariffs on net trade, while the other half is linked to how trade policy uncertainty tends to curtail corporate investments.” He admits, however, that any forecasts are relatively uncertain and the Eurozone economy has proved more resilient than expected over the first half of the year. There may still be an impact from lower interest rates.
One potential upside of the deal is it may make further Eurozone interest rate cuts more likely. Pimco suggests near-term inflation risks are tilting to the downside due to a weaker economy and, in combination with slowing wage growth and a stronger currency, that could see rates fall to 1.75%.
For the UK, it is probably neither good news nor bad. While the UK has lower tariffs and greater certainty, the differential is unlikely to be big enough to draw significant business from Europe. Alongside the Mansion House Accord, however, the UK does at least look ‘open for business’ and may win some trade at the margins.
While many in Europe will be relieved the deal negates the worse risks and the trading bloc can get on with doing business again, it is not a good outcome for the Eurozone. Stockmarkets may have been too optimistic.
