Tariffs, trade, and an uncertain global outlook

As we enter the final stretch of 2025, investors and policymakers across APAC and Europe face a challenging environment marked by geopolitical tensions, volatile trade dynamics, and policy uncertainty.. Earlier this year, the imposition of US tariffs sent growth forecasts tumbling, particularly across Europe and Asia, sparking widespread recession fears. Yet recent data has delivered upside surprises: surging AI demand, front-loaded export activity, and modest domestic recoveries have provided crucial economic cushioning.

Meanwhile, inflation has cooled significantly from its peaks, giving central banks the breathing room to ease policy. However, uncertainty remains elevated. The unpredictable nature of US tariff policy continues to unsettle investors, while rerouted trade flows and one-off inflation spikes are complicating traditional forecasting models.

Central Bank Divergence: Three Distinct Paths

Europe: A good place

The ECB has cut rates smoothly from 4% to 2%, supported by relatively predictable data and a broad consensus on the Governing Council. This has reduced volatility for investors and allowed for a more traditional policy cycle. With growth stable and inflation largely under control, the ECB is now likely to pause, maintaining rates near 2% well into 2026.

United Kingdom: A challenging backdrop

The BoE faces a considerably more challenging landscape. Inflation remains stubbornly high, the labour market is weakening unevenly, and fiscal uncertainty adds another layer of complexity. A divided Monetary Policy Committee further clouds the outlook, creating heightened volatility around data releases and rate decisions. While we anticipate scope for additional easing, the path lower is likely to prove slower and more volatile than markets currently expect.

Asia Pacific: Increasingly divergent monetary trategies

Across the Asia Pacific region, monetary policies are taking distinctly different paths. Accelerated easing is underway in New Zealand, Singapore, and Korea, where inflation has dropped sharply, and export-driven growth remains fragile. In contrast, monetary policy in Australia, Taiwan, and Malaysia has been marked by cautious rate cuts, reflecting resilient domestic demand and lingering inflation concerns.

Unique policy environments define Japan and China. Japan continues adapting to its post negative rate environment. With the BOJ attempting to balance potential economic headwinds against concerns about multi-decade high inflation. While in China, despite weak consumer sentiment and a sluggish property market, robust manufacturing and exports are expected to help the government meet its 2025 growth targets, reducing the need for major new stimulus. The People’s Bank of China (PBoC) remains focused on maintaining liquidity and keeping rates low and stable.

Emerging risk factors

Recent trade agreements have helped reduce uncertainty and resulted in tariff levels that are lower than the worst-case scenarios anticipated in April. However, investors still face several potential risks. Tariffs remain significantly higher than at the start of the year, and US policy continues to be volatile, prompting notable shifts in global trade patterns and a greater focus on domestic growth drivers. At the same time, emerging de-dollarisation trends are gradually eroding US dollar dominance, as central banks and investors flows signal diversification away from USD-denominated assets. The independence of the US central bank also remains a crucial factor influencing investor sentiment towards US treasuries. Finally, fiscal challenges are expected to remain in focus, with many governments hesitant to tackle mounting debt, resulting in greater vulnerability in public finances across numerous countries.

Implications for liquidity investors

Despite on-going volatility, we believe front-end yields remain historically attractive, presenting several compelling opportunities across regions. Following several rates cuts, most central banks are shifting towards a more neutral policy stance. With positive economic growth and lingering concerned about re-igniting inflation, we anticipate that any future rate cuts will be modest, resulting in a shallower cutting cycle and higher terminal rate.

At the same time, upward sloping yield curves and strong credit fundamentals present opportunities for tactical duration and credit positioning, potentially capturing value amid policy uncertainty. Nevertheless, during periods of volatility we continue to emphasize the importance of adhering to core investment principles – prioritising active management, diversifying across instruments and maturities, and maintaining disciplined position sizing – to achieve optimal risk-adjusted returns as we navigate the final months of 2025.