Date: 3rd June 2025.


Global Markets Under Pressure: Japanese Outflows, China’s Slump, and Trade War Fallout Shake Sentiment.



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Global markets are facing renewed uncertainty as a combination of trade tensions, weak economic data, and policy recalibrations fuel volatility across equities, currencies, and bonds.


Japan: Historic Fund Outflows and Rebalancing Pressures


Japanese equity funds witnessed their largest weekly outflows in nearly 18 years, with $7.49 billion pulled in the week to May 28, according to LSEG Lipper data. This marked the heaviest withdrawal since July 2007.


Analysts attribute the exodus to profit-taking after April’s market dip and May’s rebound, along with cautious sentiment around forward earnings. Domestic investors were the primary drivers, accounting for $7.55 billion of the outflows, while foreign funds saw a modest $59 million in inflows.


Daisuke Motori of Morningstar Japan noted this pattern of ‘buying the dip and selling the rally’ has repeated in recent months. Rebalancing by large institutional investors such as pension funds and life insurers likely added to the sell-off.


A strengthening yen—up 10% against the dollar year-to-date—is also clouding Japan’s export outlook. LSEG data shows analysts have downgraded forward 12-month earnings forecasts by 1.8% in the past 30 days.


Meanwhile, Bank of Japan Governor Kazuo Ueda reaffirmed the central bank’s commitment to tapering its bond-buying and cautiously normalizing policy, even as uncertainty looms large. While inflation reached 4.6% in April, underlying inflation remains below the BOJ’s 2% target. The next rate-setting meeting on June 16–17 is expected to review the bond tapering plan extending into fiscal 2026.


Ueda also flagged concerns about US tariffs and their impact on Japan’s economy, warning of potential hits to exports, corporate profits, and wage negotiations heading into winter.


Australia: Tariff Warnings and Rate Cuts


The Reserve Bank of Australia (RBA) is also on high alert. Assistant Governor Sarah Hunter warned that higher US tariffs could depress global trade, investment, and employment.


While the precise effects remain unclear due to policy unpredictability, Hunter confirmed that these downside risks were a key factor in the RBA’s recent rate cut to a two-year low of 3.85%. The central bank remains open to further easing, particularly if global trade deteriorates.


Interestingly, the RBA sees the tariff pressure as disinflationary for Australia, given cheaper imported goods as Chinese suppliers redirect exports. Headline inflation remained at 2.4% in Q1, with core inflation easing back into the target band for the first time since 2021.


China: Manufacturing Slumps Despite Tariff Truce


In China, the manufacturing sector endured its steepest decline since September 2022, according to the Caixin/S&P Global PMI, which fell to 48.3 in May, well below the 50 threshold signalling contraction.


The reading sharply diverged from the official PMI and surprised analysts, suggesting that smaller and medium-sized exporters, particularly in the private sector, are suffering disproportionately despite the recent US-China tariff truce.


Economists attributed the discrepancy to timing differences in data collection and methodology. Nonetheless, the Caixin results point to intensifying economic pressure, with falling export orders and production weighing on sentiment.


The trade war’s ripple effect extended to other Asian economies, with Vietnam, Indonesia, Taiwan, Japan, and South Korea all reporting declines in manufacturing output.





Currency Markets: Dollar Sinks on Trade War Woes


Currency markets reflected investor unease as the US dollar hit a six-week low on Tuesday amid signs of fragility in the US economy. The dollar index dropped to 98.58—its lowest level since late April—before partially rebounding.


Rodrigo Catril, senior FX strategist at National Australia Bank, said, 'Trade tensions are not really improving… we’ve seen the dollar getting hammered widely.’ The Aussie and Kiwi outperformed, with New Zealand’s dollar hitting a year-to-date high of $0.6054 before retreating.





The greenback weakened following a third straight month of US manufacturing contraction, while upcoming factory orders and jobs data may shed further light on the economic toll of ongoing tariff battles.


The euro briefly touched a six-week high of $1.1454 before retreating, while investors also await this week’s European Central Bank policy decision.


Adding further pressure, US tariffs on steel and aluminium are set to double to 50% this week, even as the Trump administration pushes for tougher trade negotiations globally.


The global economy is showing renewed signs of strain under the weight of trade uncertainty, export weakness, and policy recalibrations. While central banks across Japan, Australia, and China remain cautious, markets are increasingly sensitive to any signs of economic softness or policy missteps.


As the BOJ, ECB, and US data dominate the agenda in the coming days, traders will be watching closely for signs of stabilization—or deeper fragmentation—in an already fragile global landscape.


Always trade with strict risk management. Your capital is the single most important aspect of your trading business.


Please note that times displayed based on local time zone and are from time of writing this report.


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Andria Pichidi
HFMarkets


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