Feb 4, 2025
Global growth and inflation trends remain largely unchanged at an aggregate level. However, beneath the surface, growth leadership appears to be shifting from the U.S. to Japan and Europe.
The early days of the Trump presidency have unsettled markets, with a flurry of executive orders that face potential legal challenges. Policies such as aggressive immigration crackdowns risk shrinking the available workforce and could deter foreign talent from seeking employment in the U.S. Tariffs, in effect a tax on imported goods and services, may ultimately be borne by American companies and consumers, raising concerns about inflationary pressures. Meanwhile, purges of left-leaning officials within the Federal workforce could slow decision-making and hinder government efficiency.
Chart 1: Global Economic Surprise Indices – Inflation and Growth
Index
Source: Bloomberg
The feedback on the new president from households and business confidence surveys is positive but mixed. Industrial confidence has be strong most notably in Philadelphia where the indicator was way above expectations, however household confidence has been more mixed. Householders are more concerned with the disruption to everyday life with immigrant round ups and possible price inflation in the wake of tariffs.
Encouraging news from japan. The Japanese economy and policymaking went one stage further in its process of normalisation with the Bank of Japan (BoJ) raising rates to the highest level since 2009. The BoJ is more convinced that inflation has been re-established in the economy with a forecast of 2.5% in 2025.
Chart 2: Europe and Japan growth prospects improve while US growth benign
Source: Bloomberg
At the margin, the European economy showed signs of improvement in January. The composite Purchasing Managers’ Index (PMI) rose to 50.2 from 49.6 in December, marking a shift from contraction to expansion. This uptick was driven by stability in the services sector and a rebound in manufacturing. Meanwhile, the European Central Bank (ECB) provided additional support by cutting interest rates by 25 basis points and signalling a willingness to take further action in upcoming meetings.
In emerging markets, the economic narrative continues to be shapedby the arrival of increased tariffs on China and other nations. Despite this uncertainty, many economists remain confident that Chinese authorities are preparing countermeasures to support the economy. So far, most government responses have been limited to verbal commitments, but policymakers appear to be waiting to fully assess the impact of potential tariffs. Once this evaluation is complete, significant stimulus measures are expected to be implemented to stabilize and strengthen economic growth.
Asset Markets
Equities
European equities were the standout performers for the month, with several factors contributing to their exceptional returns. The UK market, for instance, posted its strongest monthly performance since November 2022. A key driver was the significant valuation gap between European and U.S. equities, which attracted investors seeking value opportunities. The forward price-to-earnings ratio for European stocks stands at approximately 13.3, compared to 21.6 for U.S. stocks. Additionally, Europe delivered positive macroeconomic news, with the European Central Bank (ECB) cutting rates by 25 basis points and signalling further easing ahead. The political landscape also provided a boost, as conditions in Germany and France appeared more stable, with governments opting for a more measured approach to budget deficit reduction.
U.S. equities had a solid month but were unsettled by the initial days of the new Trump administration and its disruptive “shock and awe” policymaking. The market also lacked its usual support from the tech sector, as several major earnings reports fell short of expectations. Additionally, the emergence of DeepSeek as a potential challenger to U.S. dominance in artificial intelligence weighed on investor sentiment in the sector.
Asian and emerging markets remained in a holding pattern, with investors awaiting clarity on President Trump’s trade policies and potential retaliatory measures from China. Market participants are also anticipating a possible Chinese economic stimulus, though it is unlikely to materialize until the impact of new tariffs becomes clearer
Table 1: Equity Market returns in January
Source: Bloomberg
Equity sector performance
For a change, the technology sector did not lead global equity markets—in fact, it lagged. In January, the global tech sector posted negative returns, marking a rare setback for the sector that has dominated in recent years.
Meanwhile, healthcare rebounded, reversing some of its recent underperformance. Although uncertainty looms due to the change in administration in the U.S., several factors support further upside: attractive valuations, robust earnings growth expected in 2024, and the likelihood of increased M&A activity. A notable example is Johnson & Johnson’s $14.6 billion acquisition of neurological drugmaker Intra-Cellular Therapies, signalling renewed confidence in the sector.
The banking sector continued its strong momentum, now outperforming global IT over the past twelve months. Banks have benefited from persistently high short-term interest rates and the absence of major economic stress. Major financial institutions reported significant profit gains for 2024, driven by a favourable interest rate environment and diversified revenue streams. European banks, in particular, have seen substantial profit growth, supported by strong lending margins and increased investment banking revenues.
Table 2: Global equity sector returns in July
Source: Bloomberg
Bond markets
Bond markets remained active throughout the month, with overall returns largely aligning with coupon yields. The U.S. 10-year Treasury yield experienced notable volatility, surging to 4.80% before retreating to a one-month low of 4.54% by the end of the period. Economic data provided mixed signals on inflation, but as the month closed, renewed concerns emerged over potential inflationary pressures. These concerns were fuelled by President Trump’s indication that he may deploy tariffs as an economic tool, adding uncertainty to the outlook for February.
Chart 3: US 2-year and 10-year bonds Track Each Other
Source: Bloomberg
Meanwhile, credit markets, including high-yield bonds and emerging market debt, performed well, with credit spreads tightening toward long-term lows. For many investors, U.S. high-yield bonds remain attractive due to their elevated absolute yields. As of January 2025, the yield on U.S. high-yield bonds stood at approximately 7.2%, offering a cushion against potential price declines driven by interest rate volatility.
Chart 4: Spreads Tighten in Credit Markets
Source: Bloomberg
Table 3: Bond market returns In January 2025
Source: Bloomberg
FX and Precious metals
Although the dollar ended the month virtually unchanged, its outlook remained a key focus for investors. Concerns over tariffs and the extended dollar rally against the yen and euro kept the currency in a holding pattern. Instead of increasing dollar positions, investors sought hedges in gold and Bitcoin.
Table 4: Monthly performance of precious metals and currencies for January 2025
Source: Bloomberg
Gold appears poised for a breakout beyond its all-time high set in the last week of January. Reports indicate strong demand for physical gold and silver in the U.S., with Bloomberg noting that $38 billion worth of gold bullion and 45 million ounces of silver have been imported since the presidential election.
Chart 5: Gold Price hits All-Time High
Source: Bloomberg
