S&P 500 Closes May with Strongest Monthly Rally in 18 Months Despite Rising US-China Trade Tensions | Weekly Market Analysis

Key events this week:

Monday, June 2, 2025

• USA - S&P Global Manufacturing PMI (May)
• USA - ISM Manufacturing PMI (May)
• USA - ISM Manufacturing Prices (May)
• USA - Fed Chair Powell Speaks

Tuesday, June 3, 2025

• Eurozone - CPI (YoY) (May)
• USA - JOLTS Job Openings (Apr)

Wednesday, June 4, 2025

• USA - ADP Nonfarm Employment Change (May)
• USA - S&P Global Services PMI (May)
• Canada - BoC Interest Rate Decision
• USA - ISM Non-Manufacturing PMI (May)
• USA - ISM Non-Manufacturing Prices (May)
• USA - Crude Oil Inventories

Thursday, June 5, 2025

• Eurozone - Deposit Facility Rate (Jun)
• Eurozone - ECB Interest Rate Decision (Jun)
• USA - Initial Jobless Claims
• Eurozone - ECB Press Conference

Friday, June 6, 2025

• USA - Average Hourly Earnings (MoM) (May)
• USA - Nonfarm Payrolls (May)
• USA - Unemployment Rate (May)

May ended on a powerful note for US equities, with the S&P 500 scoring its largest monthly gain in a year and a half, even as tensions between the United States and China reemerged as a market-moving theme. After a choppy Friday session pressured by declining chip stocks such as Nvidia, the benchmark index still managed to post a robust 5.8% surge for the month. This was its best monthly performance since the 9.5% rally in November 2023.

The broader market struggled to maintain momentum on Friday, with the Dow Jones Industrial Average ticking up 54 points or 0.1%, while the S&P 500 and Nasdaq Composite both edged down 0.1%.

Much of the pressure came from renewed trade tensions after US regulatory actions signaled further restrictions on semiconductor exports to China. Nvidia, a bellwether for the tech sector, sank nearly 3% after the company disclosed the potential for an $8 billion revenue hit from reduced chip sales to China amid escalating export bans. The news amplified investor concerns about the future of US-China economic relations and the ripple effects on global supply chains, particularly in the critical semiconductor industry.

Economic data released during the week painted a mixed picture of the US economy, fueling speculation that the Federal Reserve could soon shift toward more dovish monetary policy. The April personal consumption expenditures (PCE) price index - a key inflation gauge favored by the Fed - showed signs of cooling inflation. The headline PCE rose by 2.1% year-over-year, the slowest increase since February 2021. Meanwhile, the core PCE, which strips out food and energy prices, posted a 2.5% annual rise, slightly below the 2.6% seen in February. This data suggests inflationary pressures are receding, potentially opening the door for the Fed to consider rate cuts if the trend continues.

Adding to the economic uncertainty, data released on Thursday indicated that the US economy shrank at an annualized pace of 0.2% in the first quarter. The contraction, though modest, marks a stark contrast to recent quarters of robust growth and highlights the negative impact of trade disruptions and political uncertainty on business investment and consumer confidence.

In currency markets, the Japanese Yen continued to strengthen against a broadly softer US Dollar during the Asian trading hours. Market participants remained confident that the Bank of Japan would continue its rate-hiking path as inflation broadens in the Japanese economy. This diverging policy outlook compared to the Federal Reserve, which markets believe may shift toward easing, contributed to the Yen's gains. Moreover, the Yen benefited from heightened global risk aversion and safe-haven flows amid geopolitical tensions and ongoing trade disputes.

Meanwhile, the New Zealand Dollar climbed more than 0.5% to hover near the 0.6000 mark versus the US Dollar. The Kiwi’s rise came amid growing concerns about a slowdown in the US economy and persistent inflation pressures, which could limit the Fed’s ability to maintain a tight policy stance. Commentary from Reserve Bank of New Zealand officials indicated that the current cash rate now sits within the central bank's neutral range, and any further changes will be data-dependent, keeping the Kiwi supported in the near term.

The Australian Dollar also advanced against the US Dollar, gaining more than 0.5% on Monday. Investors reacted to weakening sentiment around the US economy as well as softening US Dollar momentum. Domestically, the Australian labor market showed signs of softening with ANZ Job Advertisements falling for the second consecutive month, down 1.2% in May. Additionally, the S&P Global Manufacturing PMI dropped to 51.0, the lowest reading since February. Despite these weaker data points, the Aussie remained resilient, helped by optimism surrounding Chinese manufacturing figures, which showed a modest improvement. Given Australia’s heavy trade ties with China, any pickup in Chinese industrial activity tends to be a positive signal for the AUD.

In Europe, the EUR/USD pair recovered from prior losses and traded near 1.1370 during the Monday Asian session. The Euro’s gains came amid news that the European Commission was preparing to retaliate against President Trump’s proposed doubling of tariffs on imported steel and aluminum. Tensions flared after Trump confirmed plans to increase steel tariffs from 25% to 50% during a campaign rally, arguing that the move was essential to protect US industry. The legal drama around the tariffs also unfolded, as the US Court of Appeals temporarily allowed the new levies to proceed, reversing a lower court’s decision that had blocked the executive orders on the grounds that Trump exceeded his presidential authority.

At the same time, European Central Bank officials offered mixed signals on the path forward for monetary policy. Governing Council member Klaas Knot expressed uncertainty over the inflation outlook, while ECB policymaker François Villeroy de Galhau hinted that the normalization of interest rates in the Eurozone may not yet be complete. These comments added to speculation about the ECB’s next moves, with markets closely watching inflation and growth data from key EU member states.

The British Pound also started the week on a stronger footing, with GBP/USD pushing higher though still trading below the 1.3500 level. Sterling’s outperformance was attributed to expectations that the Bank of England might hold interest rates steady at its upcoming meeting on June 18, opting to wait for clearer economic signals before adjusting borrowing costs. However, global risk aversion remained a limiting factor for GBP/USD gains, as broader market uncertainty continues to weigh on high-beta currencies.

Looking ahead, traders are turning their attention to a busy week of economic reports from the US, beginning with the ISM Manufacturing PMI and culminating with a scheduled speech by Federal Reserve Chair Jerome Powell. These developments are expected to play a key role in shaping expectations for future Fed policy moves and guiding near-term US Dollar sentiment.

Overall, May closed with strong equity market performance but highlighted the fragile balance facing global investors. While easing inflation in the US offers a potential reprieve from tighter monetary policy, fresh trade tensions, weak economic growth signals, and diverging central bank outlooks underscore the uncertainty ahead. Traders and investors alike will need to remain nimble as markets continue to navigate an environment marked by geopolitical risk, regulatory shocks, and shifting economic fundamentals.