The July–August 2025 market risk report highlights a softening U.S. labor market, with non-farm payrolls missing expectations and unemployment edging higher to 4.2%. Wages grew moderately, while tariffs and trade tensions with China continued to weigh on business confidence. Fed Chair Jerome Powell’s Jackson Hole remarks hinted at possible rate cuts in September, sending equities higher and Treasury yields lower. Inflation remained contained at 2.7%, though tariff effects are gradually appearing in consumer prices. Trade talks with China were extended, while Canada dropped most retaliatory tariffs to support broader negotiations.
In Europe, inflation stabilized at 2.0%, though national differences remain pronounced, with Cyprus at 0.1% and Romania above 6%. The ECB is expected to hold rates steady at 2% in September, a shift from prior expectations of further cuts. Oil prices fell sharply in early August but partially rebounded on renewed uncertainty over Ukraine. The Trump–Putin meeting in Alaska failed to deliver a peace deal, with Russia demanding major concessions from Ukraine that Kyiv rejected.
Equity markets diverged: U.S. indices reached record highs, particularly driven by Nvidia and the AI rally, despite warnings about high valuations and limited profitability from AI deployments. European equities were more subdued, with modest losses in Germany and France. In bonds, U.S. yields dropped on rate-cut expectations, while European yields edged slightly higher. Gold surged to a record $3,491 before settling lower, while Bitcoin fell 5%. The U.S. dollar weakened broadly, while the euro, sterling, and yen strengthened.
In Cyprus, inflation eased further, and government bond yields inched higher. Bank of Cyprus posted stable profits in Q2 2025, despite lower net interest income and higher costs, with capital and asset quality indicators improving. Across Europe, banks such as ING and KBC outperformed on strong lending and deposit growth. Overall, markets remain buoyed by expectations of policy easing, but risks around tariffs, overvalued equities, and geopolitical uncertainty pose significant downside threats.
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