How will markets respond to geopolitical clashes?

Markets in February

US equities markets fell in February as investors focused on the uncertainties surrounding the US President’s tariff proposals, the global response, and the widening geopolitical stance between the US, Europe and China. The S&P 500 is -1.40% MTD, the Dow is -2.07% MTD, while the Nasdaq 100 is -1.82% MTD. The NYSE is -0.33% MTD. European equity markets have had an outstanding performance in February, with the STOXX 600 +3.73% MTD. 

In the bond market, yields declined throughout most of February as investors sought out safe haven Treasuries. Fed Chair Jerome Powell told Congress that “the Fed does not need to be in a hurry to adjust our policy stance.” Traders will now be looking at January's PCE data due on Friday for further indications of when the Fed may decide to move again. In addition, investors are likely to be worried by the budget negotiations, particularly the debt ceiling and what the proposed new spending cuts may be as their size and effect on the deficit is still not known. 

The economic picture

The dollar index has been down in February and is approximately -1.7% MTD. The dollar fell over February due to weak economic data and uncertainty over US tariff implementation. The US Treasury Secretary, Scott Bessent, has said that the economy was more fragile than economic metrics suggest due to interest rate volatility, sticky inflation resulting from government overspending and overregulation, and dependence on the government sector. He believes tariffs are an important source of revenue. The US labour market moderated in January with the NFP increasing by 143,000 in January after upward revisions to the prior two months. The unemployment rate came in at 4.0%, down slightly from December’s 4.1%. However, as noted by Bloomberg news, nationwide, initial claims have been generally consistent with levels seen pre-Covid in 2019, supporting the Fed keeping interest rates on hold until inflation progress resumes. Inflation surprised to the upside in January with headline CPI rising by 0.5% m/o/m, up from December’ 0.4%, while core CPI, excluding food and energy, was up by 0.4% m/o/m, up from December’s 0.2%. Headline CPI came in at 3% y/o/y, up from December’s 2.9%, and core CPI to 3.3% y/o/y, up from the 3.2% rise in December.

On the growth front, the US economy showed some signs of slowing down. The Flash Composite PMI in February came in at 50.4, down from January’s 52.4 and the lowest level in 17 months. This may be attributable to uncertainty around the new US administration’s policies weighing on orders and business expectations. The Flash Services PMI was also down, coming in at 49.7. This was down from January’s 52.9 and a 25-month low. The Flash Manufacturing PMI came in at 51.6, up from January’s 51.2 and an 8-month high. Total nonfarm payroll employment increased by 143,000 in January and the unemployment rate decreased to 4.0% in January.

Consumers are also feeling significantly less confident about the current state of and prospects for the US economy. The Conference Board's consumer confidence index fell 7.0 points in February to 98.3. The Present Situation Index—based on consumers’ assessment of current business and labour market conditions—fell 3.4 points to 136.5. The Expectations Index—based on consumers’ short-term outlook for income, business, and labour market conditions— dropped 9.3 points to 72. The University of Michigan consumer sentiment survey showed that US consumer sentiment fell in February to 64.7 in February, from a preliminary of 67.3 and below January's revised final reading of 71.7. This is the lowest level since November 2023. This was due to concerns that President Donald Trump's plans for broad-based tariffs would hit households' purchasing power. Short-term inflation expectations surged to 4.3%, the highest since November 2023, from 3.3% in January. Long-term inflation expectations also rose, to 3.5%, from January’s 3.2% and the highest since 1995.

In the UK, headline inflation remains above the BoE’s target, coming at 3.0% in January, up from December’s 2.5%. Core inflation, which strips out volatile food, energy, and alcohol inputs, also rose, increasing 3.7% in the 12 months to January 2025, up from 3.2% in December 2024. Service price inflation accelerated to 5.0% from 4.4%. At its meeting ending on 5 February 2025, the BoE MPC voted by a majority of 7–2 to reduce the Bank Rate by 25 bps, to 4.5%. According to the BoE, headline inflation is expected to increase to around 2.8% in the first quarter of this year, up from last year’s forecast for 2.4%, and rise by 3% in Q1 2026, up from the forecast for 2.6% made in November. CPI inflation is then expected to fall back towards the 2% target in 2027. Following the rate cut on 6 February, Governor Andrew Bailey said that further rate cuts should be expected, but that “we will have to judge meeting by meeting how far and how fast”. He reiterated that a “gradual and careful approach to monetary policy remains appropriate”.

One of the chief concerns for markets is the growth picture for the UK. GDP growth was only 0.1% in Q4 2024. The S&P Global Flash Composite PMI was slightly down in February to 50.5 from January’s 50.6, a 2-month low. The Flash Services PMI Business Activity Index was up to 51.1, from January’s 50.8. However, the Flash Manufacturing PMI fell in February to 46.4 from January’s 48.3, a 14-month low. As noted by S&P, the February data signalled a moderate reduction in total new business received by UK private sector firms, with the pace of decline accelerating to its sharpest for one-and-a-half years. Moreover, the latest drop in new work received by service sector businesses was the fastest since November 2022. However, consumer confidence is up with the GfK Consumer Confidence Index for February rising by 2 points to -20, reflecting a slight improvement as households expressed more optimism about their personal finances and the broader economic outlook. 

The labour market is still holding on, but continuing high wage growth may come to worry the BoE. According to the Office for National Statistics, pay excluding bonuses rose 5.9% in the final quarter of 2024 from a year earlier, up sharply from a 5.6% rise previously. The number of payrolled employees rose by 21,000 in January and December was also revised, with the 14,000 decline far smaller than the 47,000 originally reported. The number of payrolled employees has dropped less than 20,000 since the 30th October 2024 budget when Chancellor of the Exchequer Rachel Reeves announced the increase in national insurance contributions and another big hike in the minimum wage, both of which will come into effect in April. Unemployment remained at 4.4%, better than the 4.5% expected.

In the eurozone, inflation rose to 2.5% in January 2025, up from 2.4% in December 2024, driven primarily by a sharp acceleration in energy costs. Core inflation, excluding volatile items such as food, energy, alcohol, and tobacco, remained unchanged at 2.7% for the fifth consecutive month, marking its lowest level since early 2022. On a monthly basis, consumer prices fell 0.3% in January, after rising 0.4% in December. Service price inflation fell to 3.9% in January from 4.0% in December. On the growth front, the February eurozone HCOB Flash Composite PMI came in at 50.2, the same as in January: 50.2. The HCOB Flash eurozone Services PMI Business Activity Index fell to 50.7, from January’s 51.3, a 3-month low. However, manufacturing was up with the HCOB Flash Eurozone Manufacturing PMI at 47.3, rising from January’s 46.6 and a 9-month high. As noted by S&P, new orders decreased for the ninth month in a row. Services new business fell for the first time in three months, joining manufacturing in contraction territory. Staffing levels decreased for the seventh successive month as a marked reduction in manufacturing workforce numbers outweighed a slight rise in services employment. 

However, the euro-area economy managed to eke out some growth with GDP increasing 0.1% in the three months through December from the previous quarter. This was better than the zero growth reported by the European Statistics office on 30 January. On a positive note, Q4 2024 negotiated wages rose by 4.1% from a year ago, down from the 5.4% record seen in the prior quarter. However, markets remain worried by imposition of trade tariffs from the Trump administration, the retaliatory measures the EU may take, and new security arrangements following the US President’s criticism of EU defence speeding and its refusal to allow EU member states into the peace negotiations between Ukraine and Russia. There are also signs that all is still not well with the bloc’s largest economy, Germany. The February Gfk Consumer Confidence survey for Germany revealed that confidence fell to -24.7 points from a slightly revised -22.6 points the month before. Friederich Merz, of the center-right CDU/CSU party, is likely to be the next German chancellor, but there are concerns around coalition talks ahead and how he will get the support of smaller parties to enact promised policies including reform of Germany’s “debt brake” rule that forms part of the German constitution. The debt brake limits how much debt the government can take on and states that the size of the federal government’s structural budget deficit must not exceed 0.35% of the country’s annual GDP.

Global market indices

US:

S&P 500 -1.40% MTD and +1.27% YTD
Nasdaq 100 -1.61% MTD and +0.57% YTD
Dow Jones Industrial Average -2.50% MTD and +2.53% YTD
NYSE Composite -0.33% MTD and +4.38% YTD

The Equally Weighted version of the S&P 500 posted a -0.96% this month, a decline 0.44 percentage points less significant than the benchmark.

The S&P 500 Consumer Staples sector is the top performer this month at +4.18% MTD, while Consumer Discretionary underperformed at -9.40% MTD.

The S&P 500 and Nasdaq Composite indices ended a four-day decline on Wednesday, despite a shift in market sentiment from morning optimism to afternoon apprehension following renewed tariff threats. Major US stock indices exhibited mixed performance: the Dow Jones Industrial Average declined by -0.43%, the S&P 500 remained unchanged, and the Nasdaq Composite advanced by +0.26%.

Shares of leading global technology companies experienced an increase in late trading, driven by speculation that Nvidia's earnings report could re-energise the rally fueled by artificial intelligence. Artificial intelligence-related stocks, including Super Micro Computer and Vistra, partially recovered previous losses in anticipation of Nvidia's critical earnings report. Nvidia's financial performance has evolved into a significant market event; the company's stock has experienced movements of 6% or greater on the day following its earnings release in three of the past four quarters.

A contributing factor potentially benefiting active fund managers in recent weeks is the reduced correlation in stock movements. The CBOE 3-Month Implied Correlation Index, a measure of stock market synchronicity, is currently near a record low.

In corporate news, Salesforce issued a fiscal-year revenue forecast that did not meet analyst expectations, tempering optimism regarding the potential for the company's new artificial intelligence product to accelerate sales growth.

Two short-selling firms published reports on AppLovin, triggering a record intraday decline of up to 23% before the shares partially recovered. AppLovin's Chief Executive Officer, Adam Foroughi, stated in a blog post that the reports contained "inaccuracies and false assertions."

General Motors announced an enhanced share repurchase program, planning to buy back $6 billion in shares and increase its dividend, thereby returning additional capital to shareholders.

Lowe's projected sales growth for the current year, providing an early indication that consumer spending may be rebounding after a period of restraint attributed to elevated interest rates.

Chevron has expressed interest in acquiring Phillips 66's stake in a chemical joint venture, a move that aligns with pressure from activist investor Elliott Investment Management for Phillips 66 to divest from the partnership, according to Bloomberg News.

Europe:

Stoxx 600 +3.73% MTD and +10.25% YTD
DAX +4.89% MTD and +14.49% YTD
CAC 40 +2.44% MTD and +10.34% YTD
FTSE 100 +0.66% MTD and +6.83% YTD
IBEX 35 +7.79% MTD and +14.98% YTD
FTSE MIB +7.55% MTD and +14.98% YTD

In Europe, the Equally Weighted version of the Stoxx 600 is +2.95%  in February, 0.78 percentage points less than the benchmark.

The Stoxx 600 Banks is the leading sector this month, up +12.58% MTD, while Travel & Leisure has exhibited the weakest performance at -2.19% MTD.

On Wednesday, the Construction & Materials sector exhibited the strongest performance. Marshalls reported a robust full-year adjusted EPS of 278.8 pence, surpassing expectations, and announced a 15% dividend increase while maintaining a positive outlook for 2025. Within the Materials/Fixtures segment, Wienerberger saw gains following a full-year operating EBITDA of €760 million, slightly exceeding consensus estimates.

The Insurance sector also demonstrated strength, with particular attention on Munich Re after the reinsurer reported an annual operating profit that exceeded analyst forecasts. The Basic Resources sector was in focus as copper prices reacted to news that President Trump ordered a probe into potential new tariffs on copper imports.

The Luxury Goods sector experienced gains after several prominent companies, including Burberry, LVMH Moët Hennessy Louis Vuitton, and Kering, received ratings upgrades from Kepler Cheuvreux. The Chemicals sector also saw positive movement, with Covestro reporting a net income of €266 million, significantly above consensus, while Arkema announced plans to expand its Polyvinylidene Fluoride (PVDF) capacity in North America.

The Automobiles & Parts sector underperformed relative to other sectors. Stellantis declined following a cautious 2025 outlook after a 70% decline in full-year profit. Aston Martin announced a second delay in the launch of its first battery electric vehicle and revealed plans to reduce its global workforce by 5%.

The Energy sector also lagged, with particular focus on BP after the company announced plans to increase oil and gas spending to $10 billion per year, marking a shift away from its previous renewable energy targets, and reducing its share buyback program. The Telecommunications sector experienced a decline, with attention on Deutsche Telekom after its full-year results and 2025 outlook both slightly missed analyst expectations, despite announcing plans for a €2 billion share buyback program.

Global:

MSCI World Index -0.41% MTD and +3.05% YTD
Hang Seng +17.62% MTD and +18.58% YTD

Mega cap stocks had a mostly negative performance in February with Tesla -28.13%, Alphabet -15.34%, Amazon -9.82%, Microsoft -3.69%, Meta Platforms -2.25%, while Apple +1.85%, and Nvidia +9.34%.

NVIDIA Q4 earnings. Nvidia reported revenue of $39.3 billion, representing a 78% increase from the corresponding quarter of the previous year. This exceeded the FactSet-compiled consensus of analyst estimates, which projected $38.1 billion in sales for Q4. Revenue from the Data Center division reached $35.6 billion, marking a 93% increase y/o/y.

EPS were reported at $0.89. Net income for the quarter totaled $22 billion, an 80% increase compared to the prior-year period. Analysts had anticipated a net income of $19.42 billion.

For the Q1, the company provided a sales forecast of approximately $43 billion, surpassing analyst expectations of $42 billion.

In its earnings report released on Wednesday, Nvidia disclosed that its new Blackwell AI chips generated $11 billion in revenue. This performance validated the company's prediction from the previous year regarding strong sales potential. The new chips accounted for nearly one-third of the revenue within Nvidia's Data Center division for the quarter.

CEO Jensen Huang attributed the surge in demand to a shift within the AI field towards ‘reasoning’ models. These models necessitate greater computational power as they engage in cognitive processing to formulate responses. During a call with analysts, Huang stated that DeepSeek, the Chinese AI developer whose reasoning model (which utilizes fewer Nvidia chips) had previously caused concern among investors, had, in fact, "ignited global enthusiasm."

Some industry experts concur with Huang's assessment, suggesting that DeepSeek's advancements could ultimately benefit Nvidia. This is because such models require more resources for ‘inference’ tasks, a function well-suited to Nvidia's most advanced chips. Nvidia reported last year that over 40% of its Data Center revenue was derived from inference, alleviating concerns that its chips would see diminished use for this application.

Energy stocks experienced a slightly positive performance this month, with the Energy sector +1.24% MTD. Phillips 66 +6.42%, Occidental Petroleum +4.07%, Chevron +3.99%, ExxonMobil +2.46%, Marathon Petroleum +0.40%, and Apa Corp +0.36%, while Halliburton -0.38%, Shell -1.18%, ConocoPhillips -2.73%, Baker Hughes Company -5.78%, and Energy Fuels -17.21%.

Materials and Mining stocks had a slightly negative performance this month. The Materials sector is -0.31% MTD. Gold is +3.71% MTD, while silver prices are -0.08% MTD and copper prices are +6.57% MTD. Freeport-McMoRan +5.86%, Nucor Corporation +4.78%, and Newmont Mining +2.01%, while Yara International -2.74%, Albemarle -7.91%, Mosaic -9.57%, Sibanye Stillwater -15.61%, and Celanese Corporation -25.89%.

Commodities

Gold is +3.71% MTD and +10.94% YTD. Gold prices exhibited relative stability on Wednesday, though they were subject to downward pressure from a strengthening US dollar and increased Treasury yields. Investors are currently awaiting a key inflation report to evaluate the Federal Reserve's prospective monetary policy trajectory.

Spot gold experienced a marginal increase of +0.01%, reaching $2,916.02 per ounce. Concurrently, U.S. gold futures experienced a decrease of +0.2%, settling at $2,918.20.

Market participants will now focus on the Personal Consumption Expenditures (PCE) index, regarded as the Fed's preferred measure of inflation, scheduled for release on Friday.

The consensus forecast anticipates a monthly PCE index of 0.3%, consistent with the December 2024 reading. The core PCE index, however, is projected to rise by 0.3%, an increase from the 0.2% recorded in December.

Oil prices have had a negative performance in February with WTI -5.34% MTD and -4.82% YTD and Brent -4.44% MTD and -3.12% YTD. Downward pressure on oil prices has intensified due to policies enacted by the US President, including initiatives aimed at supporting increased oil exports from Iraq. Furthermore, the President's tariff policies raise the possibility of a trade dispute and a subsequent deceleration of economic growth.

Concerns that a trade dispute could dampen demand have mitigated anxieties regarding tighter near-term oil supply, despite the imposition of new US sanctions against Iran. The US President also reversed concessions granted to Venezuela by the previous administration in 2022. The Biden administration had authorised Chevron to expand its production activities in Venezuela and to import Venezuelan crude oil into the US.

Oil prices declined to two-month lows on Wednesday, driven by an unexpected increase in US fuel inventories, which indicated weaker demand, and by the continued influence of a potential peace agreement between Russia and Ukraine. Brent crude was down 28 cents or -0.38% and settled at $72.81 per barrel. WTI crude oil futures fell by 29 cents, or -0.42%, to $68.80. Both benchmarks reached their lowest settlement prices since 10 December 2024.

EIA report: crude oil drawdown offset by rising gasoline, distillate stocks. US crude oil inventories experienced an unexpected decline last week, driven by increased refining activity. Conversely, gasoline and distillate inventories recorded unanticipated increases, according to data released on Wednesday by the Energy Information Administration (EIA).

Crude inventories decreased by 2.3 million barrels to 430.2 million barrels in the week ending February 21, the EIA reported. However, inventories at the Cushing, Oklahoma, delivery hub for US crude futures, increased by 1.3 million barrels to 24.6 million barrels, marking their highest level since November.

Refinery crude runs increased by 317,000 barrels per day (bpd) during the same period, while utilization rates rose by 1.6 percentage points to 86.5% of total capacity, according to the EIA data.

Gasoline inventories rose by 400,000 barrels during the week, reaching 248.3 million barrels, the EIA stated. Distillate stockpiles, which encompass diesel and heating oil, increased by 3.9 million barrels to 120.5 million barrels.

Net US crude imports increased by 292,000 bpd last week, as reported by the EIA. Exports of total petroleum products, however, declined to their lowest level since October 2023 during the same period.

Currencies

The dollar had a tough February due to uncertainty if the Trump administration would impose tariffs that will result in higher inflation. The dollar index has retreated over the month; it is -1.61% MTD and -1.72% YTD. The GBP is +2.09% MTD and +1.12% YTD against the USD. The EUR is +0.96% MTD against the USD and +1.04% YTD.

The US dollar appreciated on Wednesday, extending its recovery from recent 11-week lows, as investors evaluated the resilience of the US economy and the outlook for tariffs following recent statements by the US President. The dollar has appreciated in three of the past four trading sessions. The dollar index increased by +0.18% to 106.47.

The dollar had previously declined by nearly 4% from a more than two-year high reached in January, amidst growing concerns about U.S. economic growth and inflation. Investors are also contending with shifting tariff deadlines imposed by the White House on Canada and Mexico, and are assessing the potential labour market repercussions from actions taken by the US Department of Government Efficiency.

Investors were also monitoring any potential peace negotiations concerning Ukraine, which could have implications for the euro area economy and the single currency. On Wednesday, Ukraine announced that it had reached a preliminary agreement to transfer revenue from certain mineral resources to the US, ahead of President Volodymyr Zelenskiy's anticipated visit to Washington on Friday.

Sterling was +0.06% on Wednesday to $1.2674. On Monday, it reached $1.2626, its highest level since 18^th December. BoE policymaker Swati Dhingra stated that the BoE's response to increased tariffs and other trade restrictions would be contingent upon the extent of supply chain disruption, rather than solely on rising costs. Dhingra noted that higher tariffs would likely be counterbalanced by weaker global growth in the near term.

Dhingra was one of two Monetary Policy Committee members who voted in favor of a 50 bps interest rate reduction on 6^th February, while the majority supported a 25 bps reduction to 4.50%.

The euro depreciated by -0.05% to 82.92 pence on Wednesday Last Friday, it reached 82.63 pence, its lowest level since 2^nd January. The euro was down -0.26% to $1.0487.

Market expectations are for the BoE to reduce interest rates by 57 bps in 2025, while the ECB is anticipated to ease by 82 bps.

Against the Japanese yen, the dollar depreciated by +0.09% to ¥148.99, following a decline to ¥148.56 on Tuesday, its lowest level since 11^th October.

Cryptocurrencies

Bitcoin -16.18% MTD and -8-07% YTD to $88,326.96.
Ethereum -28.87% MTD and -29.85% YTD to $2,346.98.

Bitcoin was -4.98% on Wednesday and Ethereum was -6.47%. More than $800 bn has been wiped off global cryptocurrency markets over the past few weeks and appears to be driven by a mix of institutional outflows, macroeconomic uncertainty, and security concerns. The largest-ever cryptocurrency theft, the $1.5 bn stolen by hackers from cryptocurrency exchange Bybit, amplified the sell off in risk assets as investors moved to safe haven assets such as gold and bonds following on from tariff threats and shifts in geopolitical relations as the US has attempted to push Europe out of the peace talks in Ukraine. Investors have also grown frustrated that President Trump has still not enacted some of the reforms he promised during his campaign. The nominal value of the crypto industry has fallen $810 bn from its high in January, according to CoinMarketCap data. Bitcoin has fallen by over 23% from its January peak of $109,350 amid significant outflows from Spot Bitcoin exchange-traded funds (ETFs).

Note: As of 5:30 pm 26 February 2025

Fixed Income

US 10-year yield -26.6 basis points MTD -32.3 basis points YTD to 4.253%.
German 10-year yield -8.3 basis points MTD +7.1 basis points YTD to 2.440%.
UK 10-year yield -6.5 basis points MTD -6.4 basis points YTD to 4.504%.

US Treasury 10-year bond yields are -26.6 basis points (bps) over the past month.

The benchmark German 10-year yield is -8.3 bps in February at 2.440%, while the UK 10-year yield is -6.5 bps at 4.504%. The spread between US 10-year Treasuries and German Bunds declined by 18.3 bps from 199.6 bps at the end of January to 181.3 bps now.

Italian bond yields, a benchmark for the eurozone periphery, are -4.9 bps this month to 3.548%. Consequently, the spread between Italian and German 10-year yields increased by 2.7 bps from 108.1 bps on the 31^st of January

US Treasury yields declined on Wednesday, reversing earlier gains, following robust demand at the seven-year note auction and news that potential US tariffs on Mexico and Canada would be implemented on 2^nd April, approximately one month later than the initially proposed deadline.

Earlier this month, the White House administration had established 4^th March as the effective date for 25% tariffs on goods from Mexico and non-energy goods from Canada. The US President communicated these tariff plans during the administration's inaugural cabinet meeting.

In afternoon trading, the yield on the US 10-year Treasury note decreased by -4.8 bps to 4.253%. The two-year US Treasury yield, which typically reflects interest rate expectations, decreased by -1.6 bps to 4.080%.

Strong demand at Wednesday's $44 billion seven-year note auction, building upon successful sales of five-year and two-year notes earlier in the week, contributed to the decline in yields. Following the auction, US seven-year note yields were down 4.9 bps at 4.164%.

According to the CME's FedWatch tool, the highest probability for the initial 25 bps rate cut is assigned to the FOMC June meeting, with a 53% likelihood. As of Wednesday afternoon, the highest probability for a second rate cut was assigned to the September meeting, at 37%.

Late on Tuesday, the House of Representatives passed a budget resolution to advance the administration's $4.5 trillion tax-cut plan. The plan includes provisions for spending reductions, but their magnitude and impact on the deficit remain unclear.

Across the Atlantic, eurozone government bond yields remained near their lowest levels in over a week on Wednesday, as market participants assessed potential obstacles to an anticipated increase in European defense spending, much of which is expected to be funded through bond issuance.

Germany's 10-year bond yield decreased by -2.0 bps to 2.440%. Earlier in the session, it reached 2.421%, its lowest level since 14^th February.

Bunds are gaining stability as the market adopts a more cautious assessment of the near-term implementation and funding implications of defense spending proposals. Ongoing discussions in Germany suggest that the practical challenges associated with recent proposals to establish an additional special military fund or reform the debt brake over the next month may be more significant than initially anticipated by the market.

Germany's two-year bond yield, which is more responsive to ECB rate expectations, increased by +1.0 bps to 2.072%.

Markets are pricing in approximately 82 bps of additional ECB policy easing this year, with widespread expectations for the central bank to reduce interest rates for a fifth consecutive time next week.

Additionally, a survey released on Wednesday indicated that German consumer sentiment is projected to decline heading into March, as households maintain a cautious outlook on the economic and political landscape in Europe's largest economy.

Italy's 10-year yield increased by +1.8 bps to 3.548%, after reaching its lowest level since 13^th February. This narrowed the spread between Italian and German yields to 108.0 bps.

Note: Data as of 5:00 pm EST 26 February 2024

What to think about in March 2025

US budget, taxes and tariffs. The focus for markets has been on whether President Trump will go through with his threatened tariffs or if they are only opening “negotiation tactics” with countries that have a trade imbalance with the US. However, another key issue is the US budget, the debt ceiling and what any tax cuts may mean for future debt issuance.

On Tuesday evening, the House Republican caucus, in a somewhat unexpected development, passed a multi-trillion dollar budget resolution by a vote of 217 to 215. The resolution establishes a $1.5 trillion floor for spending reductions (with a target of $2 trillion), a $4.5 trillion ceiling on the deficit impact of an extension to the Tax Cuts and Jobs Act (TCJA), $300 billion in additional funding for border security and defense, and a $4 trillion increase in the debt limit.

Key observations centred on President Trump's recent outreach efforts to secure the support of wavering Republican members, representing both fiscal conservatives and moderates. Fiscal conservatives had previously voiced concerns regarding insufficient spending cuts and the dynamics of the debt ceiling. Moderates, conversely, had expressed reservations about potential reductions to Medicaid funding.

Further analysis highlighted the even more challenging next phase: reconciling the House resolution with the Senate's own, narrower budget resolution passed the previous week. Reports indicated likely Senate resistance to cuts in social safety net programs, a position that could prove problematic for House fiscal conservatives. Additionally, the $4.5 trillion allocated for tax cuts in the House resolution is insufficient to make them permanent, which is the Senate's stated preference (though potentially addressed in a subsequent reconciliation bill later this year).

Nevertheless, the passage of the resolution on Tuesday night is likely to be perceived as a near-term positive for market sentiment, given the recent escalation in concerns regarding policy uncertainty under the Trump administration. 

Key events in March 2025

The potential policy and geopolitical risks for investors that could negatively affect corporate earnings, stock market performance, currency valuations, sovereign and corporate bond markets and cryptocurrencies include:

5 March Annual “Two Sessions” meetings, China. Annual meetings of the Chinese People’s Political Consultative Conference (CPPCC) and the National Peoples’ Congress (NPC). These meetings are expected to conclude on or around March 11. This year’s agenda is expected to be a more pro-growth agenda, particularly due to a rare “symposium on private enterprises” that President Xi hosted on 17^th February.

11 March General Elections, Greenland. The elections to the 31-seat legislature are taking place following attempts by US President Donald Trump to buy the territory of 57.000 inhabitants from Denmark. While the next government is likely to be pro-independence from Denmark, there will likely be no immediate change to Greenland’s status.

18-19 March Bank of Japan Monetary Policy Meeting. The BoJ is getting closer to increasing rates again given that Japanese nominal wages rose to 4.8% in December, the fastest pace in nearly three decades and GDP figures showed Japan’s economy outperformed forecasts. However, Minister of Finance Katsunobu Kato has warned tht rising government bond yields may strain Japan’s already tight finances given the nation’s high debt-to-GDP ratio. The International Monetary Fund (IMF) forecasts that Japan’s public debt will be 232.7% of GDP this year.

18-19 March Federal Reserve Monetary Policy Meeting. Given that a number of policymakers have indicated throughout February that The Fed is unlikely to cut rates during this meeting, expectations are that the Fed will keep rates on hold despite some signs of economic slowdown. Inflation is still above target and the Fed may wish to see more signs of it dropping before initiating another rate cut. 

20 March Bank of England Monetary Policy Meeting. The BoE may feel pressured to respond to signs of stagnation in the economy but, with wage inflation well above target and headline inflation due to rise later this year, it will remain cautious. The BoE will likely keep the door open to further rate cuts this year, but the pace may be more gradual despite some MPC members, notably Swati Dhingra, suggesting that rates will continue to be a drag on growth. Money markets are only pricing in two more cuts this year.

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