Q2 2025 - Market Review
A new pope, Leo XIV, was elected, while another (sort of), Warren Buffett, announced his retirement for later this year. Even if you chose not to pay attention to what was happening in Donald Trump’s orbit, you probably thought that it was a busy quarter, with most news firmly on the positive side. Below are a few notable ones:
Inflation did not increase as much as the most pessimistic pundits suggested and, in response, market participants started to build-in more rate cut projections.
AI related capital expenditure by hyper scalers remains on the same high growth trajectory, which forced Wall Street to look past near-term uncertainty and quietly revise earnings expectations upwards.
The number of inbound containers coming through the Port of Los Angeles from Asia did not collapse as dramatically as feared.
The volume of mortgage applications appeared to have bottomed out despite stubbornly high long-term rates.
The One Big Beautiful Bill Act (“OBBBA”) sailed relatively smoothly with its front-loaded tax cuts (and delayed spending cuts) but thankfully was stripped out of its most nefarious provisions, like Section 899, which we wrote about separately in a note sent to our clients in June 2025.
The United States more or less succeeded to de-nuclearize Iran in a military operation targeting the country’s uranium enrichment facilities. The initial market reaction, or lack thereof, was atypical as compared to prior US-Iran or Israel-Iran escalations. We believe this translates into the perception that Iran has effectively lost its ability to respond militarily outside of its own frontiers and perhaps lost the domestic political support to do so.
Against this backdrop, the MSCI All Countries World Index[1] surged 9.35% higher during the second quarter. In contrast, the S&P 500 Net Total Return Index recovered from its first quarter lull with a gain of 10.83%, while the S&P TSX Composite Index advanced 8.53%. Keep in mind that these performance figures include the double-digit declines endured in the few days that followed Trump’s famous Liberation Day announcement. Another thing worth mentioning is that large cap tech leadership has been restored, with growth stocks outperforming value stocks by a wide margin. We highlight that the outperformance of large cap tech stocks is persisting early in the third quarter as it appeared that the White House would relax its previously announced ban on the sale of Nvidia’s H20 chips to China. Nvidia naturally rallied on the rumor and became the first public company to achieve a market cap of US$ 4 trillion. As further validation of the AI boom theme, CoreWeave, Inc. (Nasdaq: CRWV), which is a lessor of high-end computer chips to third-party users and which completed its Initial Public Offering (“IPO”) in late March, saw its market capitalization quadruple during the second quarter. Separately, Meta took a participation in Scale.AI worth over $14 billion.
Another development worth noting during the quarter was the acceleration of the US dollar weakness trend as proxied by the Bloomberg US Dollar Index. To this point, the US dollar, which had lost -2.71% during the first quarter, declined a further -6.60% during the second quarter, bringing year-to-date losses more than 9% against a basket of developed markets currencies-its worse showing since the early 70s.
Readers may recall that, for over a year, we have been positioning portfolios to minimize the potential impact of a US dollar decline against the Canadian dollar on client portfolios. We have done that primarily by substituting unhedged versions of global equity funds in favor of Canadian dollar hedged versions of the same funds where available and where it was fiscally sound to proceed. While this has been a successful tactical risk mitigation strategy to date, we are becoming concerned about the increasing costs associated with that strategy. The reason is that the cost of hedging against exchange rate fluctuations over a given time period primarily depends on the time weighted short-term interest rate differentials between the two countries over that time period. At the same time last year, the Bank of Canada policy rate target was 4.75% while the Federal Reserve Fed Funds rate target stood at 5.50%. This translated into an annualized cost of roughly 0.75%[2], or 0.06% per month from a Canadian perspective, if nothing changed during the course of the year. That was reasonable. As it stands now, however, the Bank of Canada policy rate target is 2.75% while the Federal Reserve Fed Funds target rate is at 4.50%. What this means is that the cost has increased to 1.75% per annum or roughly 0.15% per month. This is no longer reasonable. At the same time, we have already witnessed a significant adjustment in the value of the US dollar and, while we believe that it will continue to be under pressure as foreign leaders adjust to the White House’s updated foreign policy playbook, we question whether the US dollar will keep depreciating against the Canadian dollar at a pace exceeding the cost of hedging against it. With that in mind, in discretionary portfolios, we may revisit the strategy and selectively unwind a portion of Canadian dollar hedged version of global equity strategies implemented during the past twelve months.
DAVID RICARDO IS DEAD (WITH APOLOGIES TO BAUHAUS[3])
When I was growing up, I must confess that I had a punk episode. One of the bands that fascinated me was Bauhaus. I didn’t know it then, but the group became a harbinger of gothic rock music. Peter Murphy, the lead singer, declared in an interview with the music webzine Kerrang! a few years ago that there are two intertwined themes in its famous debut single titled Bela Lugosi’s Dead. One is about the tragedy of the Hungarian-American actor Bela Lugosi’s Hollywood career and another is about the concept of eternal life, metaphorically. In real life, Lugosi struggled to get any meaningful roles after his portrayal of Count Dracula in the first faithful large-screen adaptation in 1931 of Bram Stoker’s novel. When he died in 1956, he could not be dissociated from his stage persona and was buried with his cape, and his character would continue to live on as a pop culture icon.
David Ricardo was not a Hollywood actor, and he did not live an overly tragic life, even though he was disowned for marrying outside of his religion and that he died at a relatively young age of a trivial ear infection. Ricardo was an early nineteenth-century influential British economist and politician who introduced the idea that nations should concentrate productive resources only in industries where they have the greatest efficiency relative to their own alternative uses of resources[4]. He argued that international trade is always beneficial, even if one country is more competitive in every area than its trading counterpart. That was a vision of mutual benefits engineered through specialization. The concept later became known as the “Comparative Advantage Theory” and was among the foundational aspects behind the creation of the General Agreement on Tariffs and Trade (“GATT”) in 1947 and its evolution into the World Trade Organization in 1995. Ricardo’s ideas successfully challenged the mercantilist theory that had prevailed across the colonial empires for two centuries and, according to which, the only purpose of international trade was to generate surpluses to acquire and accumulate gold and silver.
The tragedy is that Ricardo’s vision, which brought the world decades of deflationary tailwinds and rising average living standards, quietly decomposes and crumbles alongside enlightenment rationality to feed the populist theater. We have written before[5] that while tariffs (or the threat of tariffs) might be what defines the 47th US Presidency in the public eye, this will not have as much lasting impacts as the President’s decision to surrender the United States’ soft power in broader foreign policy matters. To put it directly, the level of tariffs contemplated by the White House for certain industries or certain countries will jeopardize their very survival. From that standpoint alone, they are not sustainable. In fact, they are so ridiculous that foreign leaders cannot even logically consider them as opening offers from which to negotiate concessions, when the US Administration only seems intent on maintaining persistent uncertainty to extract even more concessions later on. Under these circumstances, why even get to the table to negotiate and seek a more stable ground if the other side cannot guarantee an end to the chaos after an agreement is reached? Therefore, for us, it is no surprise that, more than three months after Liberation Day, the White House can only claim victory for a limited trade agreement with the United Kingdom, signed on 9 May, which covers British car and steel exports to the United States. However, it did nothing to address the wider issue of the blanket 10% tariff applied to almost all United States imports from the United Kingdom[6]. Market participants, business leaders, and foreign leaders alike seem to dismiss the US administration’s seriousness in the whole process and wait for it to backtrack.
David Ricardo is dead, buried at the Highgate cemetery in North London. But like Bela Lugosi’s Dracula, he casts a long shadow. His theory still lurks behind every trade statistic. He may have gone out of fashion, but his ghost is not gone.
BACK TO THE JEKYLL ISLAND CLUB
During the second quarter, President Donald J. Trump launched an unprecedented litany of complaints towards Federal Reserve Chairman Jerome Powell and the institution itself. These complaints were largely driven by his view that the level of short-term interest rates is much higher than it should be and that this causes undue damage to the nation and, by ricochet, to his agenda. In some of his more emotionally charged tweets, he tried to force the Chairman’s hand, urged him to resign, indicated that he was actively looking for ways to fire him before the end of his term next year or suggested that his or her upcoming replacement would necessarily be someone who would quickly reduce the Fed Funds rate.
To the extent that market participants’ interest in dissecting President Trump’s decrees related to trade tariffs has faded during the quarter, their interest in his public outcry towards Powell, his own nominee in 2017, has increased, especially when it comes to bond market participants. What they are telling the rest of the world is that they do not like threats to the Federal Reserve’s independence and that they are starting to feel that it is no longer immune from political pressure. To this point, the spread between the Fed Funds Futures’ implied rate and the Federal Reserve’s own dot plot expectations by the end of 2026 has grown. At the time of writing this, the market expects the Fed Fund rate to be roughly 0.50% lower than the Federal Reserve’s own expectations for December 2026[7], which implies that the market believes that Jerome Powell’s replacement will want to lower Fed Funds more aggressively than warranted by inflation and growth data. At the other end of the term structure of interest rates, for US Treasury notes with maturities of 10 years or more, we witness the opposite phenomenon. In fact, rates have tended to rise following a Presidential communication targeting the Federal Reserve. For example, the yield to maturity on US Treasuries with a constant maturity of 30 years ended the quarter at 4.78%, nearly 0.20% higher compared to the end of the first quarter[8]. Perhaps long-term rates would have increased further were it not for the bond market’s belief in the long-term real productivity boost that artificial intelligence developments will provide. What is clear is that bond market vigilantes are all too familiar with risks that can emerge when a central banker comes under the influence of a strongman. The case of Turkey, after the ousting of its governor Murat Çetinkaya in 2019, serves as a strong reminder.
While Wall Street has always appreciated the Federal Reserve’s independence and respected its body of work, the same cannot be said of Main Street, which has always regarded the Federal Reserve suspiciously. This is particularly true in the anti-elite, libertarian, and loyal-to-Trump MAGA community who wishes that the institution be rid of the influence of a coalition of powerful bankers and that its representatives become more accountable.
Here, history repeats itself. In fact, public distrust of banks and of large centralized financial institutions is a feature that is relatively unique to United States citizens that goes back quite far. For example, when the century-old Hamiltonian idea of a proto-Central Bank was resurrected by the Republican Senator and Senate Finance Committee Chair Nelson Aldrich following the banking crisis of 1906, the mob was so angry that the group of six men that he summoned to write a plan to reform the nation's banking system had to meet secretly at the exclusive Jekyll Island Country Club, off the coast of Georgia, in late 1910[9]. While on site, they all pretended to be on a duck hunting trip. When Senator Aldrich presented his bill to the National Monetary Commission in early 1911, afraid of retaliation against group members, he refused to disclose who had participated in its redaction. Not until the 1930s have any of the participants admitted that the Jekyll Island Club meeting occurred.
It is ironic that what led to the creation of one of the most powerful and useful institution in the world had to be kept a secret from the general population for its own good. Perhaps the Federal Reserve should be left to its own devices.
IS THE GENIUS ACT[10] THE EMBRYO OF A DIGITAL BRETTON WOODS SYSTEM?
Since the beginning of the year, there has been renewed excitement about the crypto-currency and block-chain ecosystem. In fact, with a performance of 15.16%, the Bloomberg Bitcoin Index has been among the best-performing financial asset in the first half of 2025. A few catalysts explain this: a US Presidential order establishing a task force charged with developing a federal regulatory framework for the sector shortly followed by another to establish a strategic digital currency reserve helped, but perhaps the most significant development was the swift bi-partisan US Senate approval of the GENIUS Act. that now sits in the House of Representatives which is expected to merge it with its own STABLE Act[11] proposal and pass it by President Trump’s desired August deadline. This piece of legislation would create the first comprehensive federally regulated framework for payment stablecoins[12] and enable the United States to catch up with similar initiatives that have been underway in other countries for a few years already.
The desire for legislation comes as stablecoins are becoming mainstream. We have written about cryptocurrencies extensively in the past[13], and we continue to view them as nonsensical, hyper-volatile speculative instruments because they are not cashflow producing asset, they cannot widely be used as a means of exchange for goods or services, and they are too volatile to be considered a store of value. That being said, by being pegged to a stable, legal tender like the US dollar, we can at least admit that stablecoins remove the volatility argument. We also accept that, in certain countries that are either afflicted by high inflation or by an antiquated and inflexible banking infrastructure that does not make the physical US dollar easily accessible, having a digital US dollar copycat as a fast payment alternative 24/7 might be a powerful case to use it. To this point, the contributors of a Citi Institute comprehensive report released in April[14] estimated that the outstanding value of stablecoins could grow from $230 billion today to a base case of $1.6 trillion for 2030, with a bull case of $3.7 trillion.
These numbers matter because to the extent that the reserves that stablecoin issuers must hold against possible redemptions must equal at least 100% of the outstanding value of stablecoins and must be invested in short-term US government issued securities according to the draft Genius Act. This means that indirectly, growth in stablecoin issuance would lead to a corresponding growth in reserves and, as these reserves, in turn, need to be fully collateralized by US Treasury issued securities, stablecoin adoption on a large scale could represent decent, captive demand for US Treasuries, which could come handy given the incremental deficits triggered by the provisions of the OBBBA.
For stablecoins to represent a substitute to the Bretton Woods[15] system that President Nixon scrapped in 1971, this is another story. It would require broad international adoption and cross-border integration. Besides, the chances to witness a vast number of countries pegging their own currency to the US dollar are very low.
Nonetheless, as the regulatory backbone was taking shape, a speculative frenzy ensnared a few stocks in the blockchain ecosystem. From that standpoint, the IPO of Circle Internet Group (NYSE: CRCL) on June 5th at US$31 per share (roughly US$10 billion) proved timely. The company, which issues the USDC stablecoin - the second largest outstanding after Tether - had turned down, two months prior, a takeover offer from its competitor Ripple Lab worth half its IPO price. Since then, the stock price has surged over six-fold, and the market capitalization swelled to nearly US$60 billion or twelve times the price that Ripple Lab offered 4 months ago. The company, which revenues essentially consist of the interest earned on reserves held as collateral against the USDC issued, trades at over 35 times trailing twelve-month revenues. If President Trump has his way with the Federal Reserve, Circle’s interest earned per stablecoin issued will decline materially. As such, shareholders appear to be betting on phenomenal growth in USDC issuance or on the company successfully licensing its suites of API[16] tools to a large quantity of corporate users globally. We wonder what proportion of the current cohort of CRCL shareholders remember that USDC lost its US dollar peg after it revealed that 8% of its reserves were deposited in Silicon Valley Bank accounts just over two years ago. USDC declined by nearly 15% on the news.
Elsewhere, in a pattern that we find vaguely reminiscent of the late 1990s period when many ailing companies decided to add dot.com to their name and then took advantage of their inflated stock price to issue more shares, companies such as Satsuma Technology (f/k/a Tao Alpha), Bluebird Mining Ventures, and Vinanz - all listed in London - saw their stock price jump from 500% to 1000%, temporarily, after announcing that they would be using Bitcoin as part of their treasury operations. Vinanz even rebranded itself the London BTC Company. It is worth noting that the UK Financial Conduct Authority imposes numerous restrictions on domestic investors’ ability to buy US equity funds and has banned bonds and derivatives linked to cryptocurrencies. These penny stocks thus represent one of the only alternatives to gain exposure to the crypto boom, and some unscrupulous issuers are taking advantage of that loophole. Closer to home, yesteryear’s Bay Street darling, Goodfood, the national pioneer in the meal kit delivery space, attempted something similar earlier this year only to see its plan fizzle weeks later. We believe that, for most of them, this will not end well and that Michael Saylor’s Strategy (f/k/a MicroStrategy) is the exception that confirms the rule.
Patrimonica’s Investment Team
[1] Returns presented in local currency unless specified otherwise.
[2] Investors, in the country, with the lowest interest typically bear the cost of hedging that corresponds to the interest rate differential, while investors, in the country, with the highest interest capture the interest rate differential through their hedging strategy.
[3] English rock band formed in the late 70s’ whose debut single, Bela Lugosi’s Dead, with its original off-key and gloomy sound, is considered one of the harbingers of gothic rock music.
[4] Ricardo, D. “On the principles of the political economy and taxation”, London, 1817.
[5] Q1 2025 - Market Review. A note was also sent on March 7, 2025.
[6] Source: Dentons
[7] Source: Bloomberg
[8] Source: Bloomberg
[9] Source: Federal Reserve History: The meeting at Jekyll Island
[10] Guiding and Establishing National Innovation for U.S. Stablecoins Act
[11] Stablecoin Transparency and Accountability for a Better Ledger Economy Act
[12] A stablecoin is a type of cryptocurrency designed to have a stable value, often by being pegged to a stable asset like the U.S. dollar or gold. Unlike other cryptocurrencies that experience significant price fluctuations, stablecoins aim to provide a more predictable and reliable form of digital currency for transactions and as a store of value. For this reason, stablecoins are often portrayed as digital dollar or digital gold.
[13] Q4 2020 Market Review and Q1 2024 Market Review
[14] Citi Institute, “Digital Dollars: Banks and Public Sector drive blockchain adoption”, April 2025
[15] The Bretton Woods system established the rules for commercial relations among a group of over 40 countries. It prevailed from 1944 to 1971. It was the first fully negotiated financial order intended to govern monetary relations among independent states. It required participating countries to guarantee convertibility of their currencies into U.S. dollars to within 1% of fixed parity rates, with the dollar being convertible to gold bullion for foreign governments and central banks at aa fixed price of US$35 per troy ounce. The system was terminated unilaterally by President Richard Nixon in 1971 as gold reserves had declined to the point of not being to guarantee the US dollar convertibility at the prescribed price.
[16] Application Program Interface
Photo credit: Wikimedia Commons - Portrait of David Ricardo (1772-1823) by Thomas Phillips