MARKET COMMENTARY – FEBRUARY 2025

Global equity and fixed income markets saw positive returns in January, shaped by economic data, fiscal policies, and geopolitical developments. Investor optimism over US economic resilience and fiscal policies under the new administration contrasted with ongoing pressures in the UK and challenges in emerging markets. Commodities experienced renewed momentum, supported by shifting trade policies and seasonal demand trends.

European equities outperformed in January, with the MSCI Europe ex-UK Index gaining 8.2%. Financials and consumer discretionary stocks led the market higher, supported by improving macroeconomic data and an expansionary policy backdrop. The Eurozone composite Purchasing Managers’ Index (PMI) returned to growth territory at 50.2, while retail sales posted five consecutive months of gains. Meanwhile, UK equities delivered a solid performance, with the FTSE All-Share Index rising 5.5%, benefiting from a weaker sterling, which boosted the earnings outlook for internationally exposed firms.

US equities extended their rally into the new year, with the S&P 500 and Dow Jones indices reaching record highs. Strength in the technology sector, led by gains in AI and software companies, drove market performance. However, the emergence of Chinese AI firm DeepSeek disrupted sentiment, leading to a historic single-day loss for Nvidia. Despite these headwinds, robust corporate earnings and resilient economic data, including steady consumer spending and job market strength, continued to support valuations.

Emerging markets experienced mixed results as currency headwinds and China’s property sector woes continued to weigh on sentiment. The MSCI Emerging Markets Index rose 1.8%, with Chinese equities posting modest gains amid expectations for additional policy support. Indian equities underperformed, declining 3.5% for the month, as corporate earnings failed to meet expectations, adding to concerns off overgrowth momentum.

Developed market central banks have generally maintained a cautious approach to monetary policy. The US Federal Reserve maintained its federal funds rate at 4.25%-4.5%, as progress on inflation and employment data pointed to a measured approach to policy adjustments. Market expectations for rate cuts in 2025 have moderated, with only three reductions anticipated due to lingering inflation concerns. In the UK, the Bank of England held policy rates, acknowledging continued inflationary risks and fiscal pressures following the UK Budget, however hinting at further cuts in the coming months. European central banks remained broadly accommodative, with the European Central Bank signalling flexibility in response to evolving economic conditions.

Fixed income markets saw heightened volatility, driven by shifts in global monetary policy expectations and geopolitical risks. US Treasury yields initially climbed on inflation fears but retreated following softer-than-expected data and a downturn in tech stocks. In Europe, bond markets exhibited mixed performance, with Italian bonds remaining flat while German Bonds declined 0.4%. UK Gilt yields briefly touched their highest levels since 2008 before easing on weaker inflation data, ending the month with a 0.8% gain.

Commodities staged a strong performance in January, with the Bloomberg Commodity Index rising 4.0%. Gold and industrial metals advanced as trade policy uncertainties and inflation concerns bolstered safe-haven demand. Oil prices moved higher, supported by cold weather and renewed geopolitical tensions, including the potential for fresh US sanctions on Russia.

New US tariffs and a potential trade war pose a growing risk to global markets and economic stability. President Trump’s proposed levies, 10% on Chinese imports and 25% on goods from Mexico and Canada, have, heightened volatility, and strained diplomatic ties. In response, Canada and Mexico agreed to strengthen border security, delaying a full trade conflict, while China swiftly imposed retaliatory tariffs on key US sectors, including energy, agriculture, and manufacturing. Economists warn these measures could push inflation up and restrict global economic growth. Despite acknowledging potential economic pain, Trump insists the tariffs are necessary to achieve broader policy goals, leaving investors wary as trade tensions escalate.

As markets look ahead to 2025, economic resilience, fiscal policy dynamics, and technological innovation remain key themes. US equities continue to benefit from strong corporate fundamentals, though valuation risks persist. European and UK markets show signs of stabilisation even with the threat of potential tariffs, while emerging markets remain susceptible to external pressures. Fixed income and commodities offer diversification potential in a landscape shaped by shifting central bank policies and geopolitical developments.

Total returns in GBP to 31/01/2025

*January 2025

Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk

This commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.