The week that was …
Economic round-up
UK rate decision
The Bank of England decreased UK interest rates to 4.25% from 4.5%, hinting more cuts could follow in the coming months. Governor Andrew Bailey refused to “give predictions as to when and how much” but said he was “still of the view that the path, gradually and carefully, is downwards”. Read more from the BBC here
US rate decision
As widely expected, the US central bank kept rates on hold. The FOMC said that uncertainty about the economic outlook had increased further and voted unanimously to keep the federal funds target at a range of between 4.25% and 4.5%. Read more from the FT here
US/UK trade deal
The UK and US announced a ‘breakthrough’ trade deal, which lowered the tariffs on cars, aluminium and steel. UK business secretary Jonathan Reynolds said the deal would safeguard thousands of British jobs – particularly in the automotive sector. Read more in ‘In focus’ below and from the Guardian here
China trade data
China’s exports beat forecasts in April, buoyed by demand for materials as Donald Trump paused on tariffs. Outbound shipments rose 8.1% year on year. Read more from Reuters here
US trade balance
The US trade deficit widened to a record high in March as businesses boosted imports of goods in anticipation of Donald Trump’s tariffs regime. The report showed the US importing a record amount of goods from 10 countries, including Mexico and Vietnam. Read more from Reuters here
China services PMI
Business sentiment in China dipped to its lowest level since February 2020. The headline Caixin China General Services Business Activity index posted 50.7 in April, down from 51.9 in March, but above the 50-mark, which indicates expansion. Read more from S&P here
UK construction PMI
Construction activity decreased for the fourth consecutive month as rising business uncertainty led to delayed decision-making on new projects. At 46.6 in April, the headline S&P Global UK Construction Purchasing Managers’ index remained below the 50-mark, but was up slightly from 46.4 in March. Read more from S&P here
Markets round-up
US/China trade talks begin
Talks between the US and China began in Switzerland over the weekend. Donald Trump said the two sides had negotiated “a total reset … in a friendly, but constructive, manner”. Read more from Reuters here
US debt CDS spreads widen
The cost of insuring exposure to US government debt has climbed, as investors digest ongoing policy uncertainty. In recent weeks, spreads on US credit default swaps (CDS) have widened to their highest level since the debt-ceiling crisis of 2023. Read more from Reuters here
Currency volatility in Asia
Asian investors have been rushing to shield themselves from big swings in the US dollar, which has driven volatility in their local currencies. Hong Kong’s authorities have been forced to intervene in the market. Read more from the FT here
Dax hits new heights
The German Dax index climbed to a record high on Friday, fully recouping the losses sparked by Donald Trump’s tariff announcements. The index was buoyed by investor optimism over US trade deals. Read more from the FT here
“We have conflated a really important financial risk with people’s values and we have tried to create products that do both. In doing so, we have created a lot of confusion
Selected equity and bond markets: 02/05/25 to 09/05/25
| Market | 02/05/25 (Close) |
09/05/25 (Close) |
Gain/loss |
|---|---|---|---|
| FTSE All-Share | 4652 | 4641 | -0.2% |
| S&P500 | 5687 | 5660 | -0.5% |
| MSCI World | 3725 | 3712 | -0.3% |
| CNBC Magnificent Seven | 302 | 301 | -0.3% |
| US 10-year treasury (yield) | 4.31% | 4.40% | |
| UK 10-year gilt (yield) | 4.52% | 4.57% |
Investment round-up
£3bn net outflow for UK-based funds
Investors placed £507m into UK-based funds in March, according to data published by the Investment Association – however, the sector saw a net outflow of £3bn over the first quarter as concerns over tariffs, rising inflation and an uncertain interest rate outlook weighed on sentiment.
Bond funds sell off
April’s market storm saw UK investors sell out of bond funds at the fastest rate since the onset of the Covid pandemic, according to Calastone’s Fund Flow index. Investors pulled a net £1.24bn from bond funds in the month, while a net £589m flowed into the ‘safe haven’ of money markets.
New ratings from RSMR
Fund research company RSMR announced 24 new fund ratings for providers including Pimco, Royal London and Schroders. This follows 11 new fund ratings announced last month.
Co-CIOs for NTAM
Northern Trust Asset Management has appointed Michael Hunstad and Chris Roth as co-chief investment officers. The appointments will take effect from 1 June 2025.
… and the week that will be
Eyes on US consumer
US economic data is starting to reflect the impact of the new administration’s radical economic programme and this week should offer fresh insight, with April’s consumer price index showing the impact on inflation trends, and retail sales data revealing consumer confidence. This data may show if, as has been widely predicted, import levies start to drive up prices and slow growth. Read more from Reuters here
Trade-talk progress
Trade talks began in Switzerland between the US and China this weekend and any signs of a thawing of the trade war between the two countries would be welcomed by markets. China headed into the talks with stronger cards than expected, having reported a significant increase in worldwide exports for April. It appears many US importers have not been able to switch suppliers easily and may need to pass on the higher costs to consumers. Read more from Reuters here
The week in numbers
UK GDP (Q1, preliminary): Consensus forecasts have UK growth at 0.6% quarter-on-quarter from 0.1%, and 0.9% from 1.5%, year on year
UK unemployment data: Consensus expectations are for the March unemployment rate to hold at 4.4%, while earnings are expected to rise 5.3% – down on last month’s 5.6%.
US CPI (April): US prices are expected to rise 0.3% month-on-month from -0.1%, and 2.6% year-on-year from 2.4%. The core consumer price index (CPI) is expected to rise 0.2% month-on-month and 2.8% year-on-year, from 0.1% and 2.8% respectively.
US PPI (April): Initial jobless claims in the US are expected to rise to 231,000 from 228,000. The producer price index (PPI) is forecast to rise 0.2%, month on month, from -0.4%.
Japan GDP (Q1, preliminary): Growth is forecast to be 0.1% quarter-on-quarter and 0.2% year-on-year, from 0.6% and 2.2% respectively.
US consumer sentiment (May, preliminary): The Michigan index of consumer sentiment in the US is expected to edge down to 52 from 52.2.
Company news: Half-year/quarter results expected from Burberry, Cisco, Imperial Brands and Land Securities.
In focus: Green around the gills
Almost a year on from the introduction of new sustainability labels in the UK, just one-fifth (20%) of funds claiming sustainability characteristics have adopted them. A new report from Morningstar shows 94 funds in the UK, representing $47bn (£35.6bn) of assets now boast a label. In Europe, funds are also dropping their ESG labels. Is this a welcome end to ‘green-washing’ – or a sign ESG no longer has the marketing pull it once did?
Morningstar estimates that, over the past 15 months, more than 640 European funds with ESG-related terms in their names (14%) have rebranded, including more than 590 (12%) that have dropped or changed ESG terms. ‘Sustainable’ or ‘sustainability’ were ditched by more than 90 funds and added by only one over the last quarter.
The labelling regime has certainly exposed some problems. In the UK, for example, the new labels almost inevitably exclude passive options and, given the increasing dominance of that approach, this is likely to weigh on the flow data. ETFs are automatically excluded because the labels only apply to UK-domiciled funds – and all London-listed ETFs are domiciled elsewhere. Of the 128 funds removing the term ‘ESG’ in the UK, 96 were passive.
A bigger issue is that ‘sustainability’ may no longer be a selling point, which would mean funds have no great incentive to meet the label criteria. Morningstar data shows global sustainable open-ended and exchange-traded funds suffered record outflows in the first three months of 2025. Investors withdrew an estimated $8.6bn – a stark reversal from the $18.1bn in inflows seen in the previous quarter.
This sell-off may be partly attributable to the machinations of an unfriendly White House, which has made its feelings clear on sustainability factors such as DEI and climate change targets, and large US companies are adapting their communications to address corporate sustainability efforts and reporting.
According to a new report by The Conference Board, the share of S&P100 companies using ‘ESG’ in their annual sustainability report titles dropped from 40% in 2023 to 25% in 2024. Pointedly, the MSCI ESG Leaders Indices were renamed the MSCI Selection Indices as of 3 February 2025.
This sell-off may be partly attributable to the machinations of an unfriendly White House, which has made its feelings clear on sustainability factors such as DEI and climate change targets.”
That said, the US still makes up a relatively small part of the overall universe of ESG funds – just 10% of the total, or $330bn of assets. It lost $6.1bn through outflows in the first quarter, having lost $4.3bn in the final quarter of 2024.
More worrying, therefore, were the statistics from Europe, where climate commitments from governments are still strong and there has been no attack on DEI. Europe recorded its first quarter of net outflows since Morningstar started tracking this universe, with redemptions of $1.2bn.
The continent is by far the largest market for ESG funds, with 84% of funds run sustainably – as such, its loss of faith with ESG would be far more consequential. It comes at a time when European markets have, in general, been doing relatively well, with money repatriating from the US.
Part of the problem has been performance. The MSCI Selection index – which still incorporates ESG criteria, in spite of the change of name – has lagged the MSCI World index over five years, with an annual return of 13.8% versus 14.5% for the MSCI World.
More recently the very strong performance of defence stocks has weighed on the sector. Not all sustainable funds exclude defence companies – and the FCA recently confirmed that “nothing in our rules, including those related to sustainability, prevents investment or finance for defence companies” – but many do, and that has hurt performance.
Nevertheless, Fabiana Fedeli, M&G’s investment officer for equities, multi-asset and sustainability, believes ESG is moving to a better, more realistic, place. “The beginning of any innovation gets to a peak of unlikely expectations and then investors go to the trough of disillusionment, expectations reset and then you move to the slope of alignment,” she says. “I like to think we are on the slope of alignment.”
The beginning of any innovation gets to a peak of unlikely expectations and then investors go to the trough of disillusionment, expectations reset and then you move to the slope of alignment. I like to think we are on the slope of alignment.”
Fedeli argues that responsible investors cannot simply stop paying attention to ESG factors, adding: “We know there are issues with climate change that represents a cost to businesses. The way you treat your human resources has an impact on your results. Governance has been something we have focused on. Sustainability remains critical to the investment process.”
For his part, Dan Kemp, chief research and investment officer for Morningstar, says: “We have conflated a really important financial risk – discovered over the last 15 years or so – with people’s values and we have tried to create products that do both. In doing so, however, we have created a lot of confusion. Investing with your values is a great thing to do, but often comes with a financial cost. If you start adding a non-financial factor into your portfolio, you are constraining. We have got to be a lot clearer.”
Such clarity would include explaining to investors the potential trade-offs involved in ESG investment. “A lot of my clients are passionate ethical consumers and their finances are a part of that,” says Olivia Bowen, an adviser at ethical financial advice firm Castlefield.
“There are cycles when ethical investments underperform and we are going through one of those at the moment. That is a more difficult conversation to have with clients who are less committed. If clients are fully on board with what we are doing, it is easier.”
And, according to Sonja Laud, chief investment officer at Legal & General Investment Management, clients often do not understand the time horizon mismatch for ESG risks. “The integration of sustainability factors, particularly those with clear financial materiality, is a must-have for us to deliver against our fiduciary duty,” she explains.
“We have not had very healthy debate. Risks such as climate change will manifest themselves in a very idiosyncratic way, depending on where a company has its production facilities. It is that level of understanding that is needed.”
Until recently, ESG inflows had defied gravity but the sector is now facing a shake-out, with sustainability labelling forcing companies to think more deeply about whether the tag is helpful to them. Even so, factors such as climate change represent a clear financial risk to some businesses, and incorporating sustainability metrics is still a natural part of good governance and sound fiduciary management – whether or not it is on the label.
In focus: Big deal?
Last week, the UK became the first country to announce a trade deal with the US since the ‘Liberation Day’ tariff announcements. The deal mitigated the worst effects of Donald Trump’s tariff regime, providing something of a reprieve for the UK’s car, steel and aluminium industries. Coming in a week where the Bank of England also cut interest rates and outflows from the UK stockmarket noticeably slowed, could this be the long-awaited ‘turning point’ for the UK?
Despite attracting some criticisms, the deal would appear better than nothing. As Anthony Willis, senior economist at Columbia Threadneedle, notes: “Ultimately this is not a ‘trade deal’ as such – this is a narrow agreement to cut or limit the scope of tariffs imposed by the US last month.
“A detailed trade deal would take significantly more time and detailed negotiation. It would also need the approval of Congress. But it sets a template for other countries and also serves as a reminder that, with baseline and other tariffs set to remain in place, the overall US tariff regime is still set to be higher than anything we have seen since the 1930s.”
The deal will preserve jobs in ‘at risk’ sectors – plus the UK has not yet been forced to make any concessions on vulnerable areas such as food standards or the tax on technology companies: “What is positive for the UK is that nothing in the deal threatens ongoing talks with the EU on a ‘reset’ in the trading relationship,” adds Willis. Europe is a larger portion of UK trade and the outcome of those trade negotiations will be more impactful for the European economy.
For her part, Miranda Seath, director of market insight at the Investment Association (IA), believes that, in combination with a rate cut, the deal could make a difference for the fortunes of UK equity funds. “While the IA’s fund flow data for the first quarter shows UK equities have had a difficult start to 2025, we may see a sentiment shift over the coming months,” she says
“If investors are looking to rebalance their portfolio away from the US, the UK could now be an attractive option. It has avoided being hit by significant tariffs and has set a clear fiscal policy, leaving UK stocks looking to be good value.”
Research from the IA has also revealed positive investor sentiment towards the UK, Seath adds, noting: “Over half (54%) of UK investors agreed investing in UK companies could offer strong opportunities for growth over the next five years, rising to three-fifths (60%) when given a 20-year horizon. Younger generations are even more optimistic about the UK, with almost three quarters (73%) of both Gen Z and Millennials agreeing that investing in UK companies offers strong opportunities for growth over the next 20 years.”
The UK’s finances are still precarious, with high debt, significant demands on public services, and a low tolerance for cutbacks, but the weakness of its stockmarket looks out of step with the relative resilience of its economy. Trade deal or not, what was agreed between UK and the US ought to help investors take notice.
