SPW MarketWatch: February 2025

FactSet, 11 March 2025. Figures are monthly price returns in local currencies for February 2025.

A look back at markets in February when US stocks fell while European shares outperformed. Bond yields fell (meaning prices rose) amid signs of rising risks to growth.

US

In February, US stocks dropped due to weaker economic data and worries about trade tariffs (1). The consumer discretionary and communication services sectors were the weakest, while consumer staples* gained. Concerns about the earnings of major tech companies, especially those involved in artificial intelligence, also affected returns.

Trade tariffs added to the uncertainty. President Trump threatened 25% tariffs on EU goods and confirmed tariffs on Canadian and Mexican goods would start in early March after a brief pause (2).

Minutes from the January Federal Open Market Committee (FOMC) meeting indicated that policymakers wanted to see “further progress on inflation” before considering any further rate cuts. The Federal Reserve kept rates on hold during the January meeting (3).

Eurozone

In February, Eurozone shares rose, mainly due to strong earnings and shareholder return plans in the financial sector, especially banks (4). Communication services also did well, and defence stocks in the industrials sector increased due to expected higher military spending. However, the information technology and healthcare sectors did not perform as well.

Investors were hopeful for a ceasefire between Russia and Ukraine, with politics being a major focus during tense meetings between European leaders and the Trump administration. In Germany's elections, Friedrich Merz’s Christian Democrats (CDU) became the largest party, likely forming a coalition with the Social Democrats (SPD). The new government is expected to focus on increasing defence spending (5).

UK

In February, UK equities rose, led by gains in the financials, healthcare, and industrials sectors (6). However, consumer discretionary, consumer staples, and basic materials sectors did not perform well. Large cap banks, defence companies, and major pharmaceutical groups experienced gains, while sentiment towards UK small and mid-sized companies worsened, impacting their respective indices.

The poor performance of UK small and mid-sized companies was due to concerns about the domestic economic outlook, especially in consumer-facing sectors like housebuilders and retailers. News that the UK narrowly avoided a recession at the end of 2024 did little to improve sentiment.

Government bond markets stabilised, but the UK's fiscal outlook remained a concern.

Prime Minister Keir Starmer announced an increase in defence spending to 2.5% of GDP by 2027 (7), raising fears that Chancellor Rachel Reeves might need to increase taxes again.

Inflation rose to 3% in January, the highest rate in 10 months, but this was better than expected allowing the Bank of England to cut interest rates by 25 basis points.

The UK avoided US tariffs, which helped strengthen sterling, following a poor January due to fiscal outlook concerns and hopes for better EU relations.

Japan

In February, the Japanese equity market declined. This was mainly due to weak performance in large-cap technology and exporter stocks. Uncertainty around US trade policy led to a sell-off in Japanese equities, especially AI-related and exporter stocks.

Concerns about a US economic slowdown caused US government bond yields to drop. In Japan, strong economic data and hawkish comments from Bank of Japan officials increased Japanese government bond yields, narrowing the interest rate gap with the US and appreciating the yen, which hurt exporter stocks.

Despite rising costs and global market uncertainty, Japanese companies reported solid earnings for the December quarter, supported by better corporate governance, such as share buybacks and dividend hikes.

Emerging markets

In February, emerging markets (EM) rose, driven by gains in China due to optimism about its AI capabilities. The MSCI EM index outperformed the MSCI World and S&P 500 indices, which both declined.

Global bonds

In February, market uncertainty in the US increased due to policy concerns and weak economic indicators. Investors preferred US Treasuries, causing yields to drop, while corporate bond spreads widened. European bonds performed better.

US Treasuries outperformed other global bonds. European bonds had modest returns, with notable yields in Germany, Spain, and Italy. The German elections and Ukraine war discussions added to the uncertainty.

Commodities

In February, the S&P GSCI Index fell. Livestock and agriculture performed the worst, while industrial and precious metals gained.

* Consumer staples are essential products that people regularly buy and use, regardless of economic conditions. These include items like food, beverages, household goods, and personal care products. Companies in this sector tend to be more stable because their products are always in demand.

Sources:

(1) European stocks steady after US markets plunge – BBC News

(2) How will the latest Trump tariffs affect the UK? – BBC News

(3) Minutes of the Federal Open Market Committee, January 28-29, 2025

(4) Euro zone investor morale improves in February - Reuters

(5) Germany's conservatives celebrate, but far right enjoy record result – BBC News

(6) UK equities experience confidence surge as investors sour on the US – Money Week

(7) Prime Minister sets out biggest sustained increase in defence spending since the Cold War – GOV.UK

(8) Bank of England cuts interest rates to 4.5% and slashes UK growth forecast – BBC News