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Markets last week
Summary
European equities hit all-time highs, driven by optimism over interest rate cuts, a Ukraine resolution and strong earnings, with Germany leading gains
The UK economy grew 0.1% in Q4, taking 2024 Gross Domestic Product (GDP) growth to 0.9%, as services and construction offset production declines
The Bank of England (BoE) remains cautious on rate cuts, citing persistent inflation and strong pay growth
US stocks gained 1.5%, but US dollar weakness offset gains after Trump announced a more targeted approach to tariffs
January US Consumer Price Indices (CPI) exceeded expectations, rising 0.5% month-over-month, highlighting ongoing inflation concerns
Federal Reserve (Fed) Chair Powell indicated rate cuts are unlikely soon, with the market pushing back expectations for a rate cut until September
Chinese and Hong Kong stocks gained, boosted by tariff news, with Hong Kong stocks seeing a 7.0% surge
This week: UK inflation may rise to 2.8%, while Japan’s inflation could support further rate hikes from the Bank of Japan (BoJ).
Market Review
Europe
European equities saw strong performance last week, hitting fresh all-time highs. Europe is the best performing market year-to-date as investor sentiment has been bolstered by optimism surrounding interest rate cuts, a potential resolution to the Ukraine conflict and robust earnings reports from major companies. German equities led the charge, rising 3.33%, while the French bourse gained 2.58%.
UK
The UK’s FTSE 100 added a modest 0.37%, supported by unexpected growth in the UK economy during Q4 2024. The UK economy grew by 0.1% in the fourth quarter, defying expectations for a contraction. Services and construction output helped offset a drop in production. This was a welcome surprise after a weak 2023, with GDP growth at 0.9% for 2024, up from 0.3% last year. BoE Chief Economist, Huw Pill, cautioned against aggressive rate cuts, citing persistent inflationary pressures and strong pay growth, echoing the BoE’s cautious stance.
US
US stocks continued their upward trajectory climbing 1.5% towards new highs. The gain in local currency was eroded by US dollar weakness vs sterling as tariff fears were alleviated following Trump’s comments; in sterling terms US equities declined 0.2%. Growth stocks underperformed value stocks for the second week running and small-caps underperformed large caps.
January’s inflation data came in hotter than expected rising 0.5% month-over-month, pushing the annual CPI to 3.0%. This acceleration was mainly driven by higher shelter costs. Core CPI, excluding volatile food and energy, also rose 0.4%. This reinforced concerns over persistent inflationary pressures.
Fed Chair Jerome Powell indicated that while inflation has made progress, policymakers are not yet ready to ease restrictions. His remarks suggest that rate cuts are still some months away. The futures market now isn’t pricing in another rate cut until September.
Treasury yields were volatile in response to the inflation data. The 10-year treasury yield briefly surged to 4.66% following the CPI report, before retreating later in the week. Corporate bonds, particularly in the investment-grade sector, outperformed treasuries, with light issuance and strong demand driving market strength. Despite fluctuations in rates, the high-yield bond market remained resilient.
China
Chinese and Hong Kong stocks saw solid gains thanks in part to Trump’s announcement that he would take a more targeted approach to tariffs, with reciprocal tariffs on a country-by-country basis by 1 April. This move alleviated market uncertainty, as it allows more time for negotiation and reduces the risk of a global trade escalation.
Hong Kong equities surged 7.0% led by strength in technology stocks, particularly those focused on artificial intelligence, driven by hopes that the US might ease some of its tariff burdens on Chinese goods.
The week ahead
Wednesday: UK inflation
Our thoughts: Inflation is expected to rise in January, with the headline annual rate forecast to increase to 2.8% from 2.5%. Services inflation, which is a key focus for the BoE, is anticipated to rise from 4.4% to 5.2%. Persistent services inflation is likely to keep headline inflation above the 2% target for much of 2025, although the BoE may be inclined to proceed with rate cuts in response to a slowing economy.
Thursday: Japan inflation
Our thoughts: Japan is in an interesting and independent monetary cycle. The BoJ has finally abandoned negative interest rates amidst higher inflation. Inflation in January is expected to rise to 3.9% increasing the likelihood for the BoJ to continue to normalise policy. The market expects them to move slowly in raising rates with the next hike priced in for September.
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Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. Where investment is made in currencies other than the investor’s base currency, the value of those investments, and any income from them, will be affected by movements in exchange rates. This effect may be unfavourable as well as favourable. Past performance and future forecasts figures are not a reliable indicator of future results.
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