Weekly Overview 20. – 26. Jan 2025

The content of this post does not constitute financial advice. It is intended for information and education purposes only.

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The Week in Global Markets

Financial markets summary:

– EUROPE: As Donald Trump took office in the United States, European markets appeared to breathe a sigh of relief during this week, most likely driven by the fact that he has not yet announced tariffs during his first days back in the White House. Most major indices rose, supported also by the expectations that the ECB will keep reducing its policy rates next week. The flash Purchasing Managers’ Indices (PMIs) for the Eurozone turned more positive, with the Composite moving back into expansion territory and the manufacturing index rising to an 8-month high. However, the improvement so far is only marginal as there are signs of rising business activity, but at the same time, input costs went up sharply. Some indicators are still pointing to negative underlying developments such as the decline in new orders, and the continuing drop in external demand. In Germany, while there are also signs of recovery, so far services are in expansion while manufacturing remains in contraction. Inflows of new business fell for both sectors and firms continued to cut jobs. The second biggest economy, France, remained in contraction, although the pace softened compared to previous months. Comments by ECB President Lagarde and the head of the French central bank reiterated their confidence about the deceleration of inflation the return to target, and signaled that rate cuts will continue. In the UK, the FTSE 100 was basically unchanged week-on-week, despite the positive PMI numbers showing expansion in services and overall business activity. However, there are rising cost pressures and re-accelerating wage growth that may be cause for concern when it comes to inflation. The unemployment rate for November also rose unexpectedly. The euro and the pound both appreciated against the US dollar this week.

– UNITED STATES: As the returning US president kicked off his first week back, his new policy announcements took center stage. Trump did not start with new tariffs immediately and instead requested that federal agencies review existing trade policies of the United States to find out what impact potential future tariffs may have. Nevertheless, he said he would likely impose 25% tariffs on Canada and Mexico in February. He has been mostly reluctant to announce more specific tariff intentions for China (although a 10% figure was mentioned), hoping that a trade deal could be reached instead. One of the major drivers of stock market performance this week was Trump’s announcement of a $500bn strategic investment in the construction of data centers and AI infrastructure, as a joint venture called Stargate (involving Oracle, OpenAI, Softbank, MGX). Another announcement that seems to be geared toward US businesses is that Trump plans to have corporate taxes cut from 21% to 15% for companies who decide to produce at home instead of abroad. Out of the Magnificent 7, Apple was the biggest underperformed as the stock price fell following several downgrades of the company by equity analysts due to lower-than-expected iPhone sales, which led to the company being surpassed in market capitalization by NVIDIA. S&P PMIs showed that growth in business activity likely slowed down in January, as services output grew at a slower rate while manufacturing output rose at a quicker pace. Existing home sales were up in February, but for the full year 2024, they were down as a result of high interest rates and home prices. Fed data showed that Americans continue to spend more on credit cards and are carrying bigger balances month-to-month. A key thing to keep in mind for the following weeks and months is the pressure that Donald Trump is expected to put on the Fed to lower interest rates. This Thursday, he stated he would “demand that interest rates drop immediately” during his Davos World Economic Forum speech, intending to speak at the right time with Jerome Powell about these plans. Markets, however, are not yet taking any of these comments seriously and the probability is still very low for a cut before May.

– ASIA-PACIFIC: The Bank of Japan raised its policy rate this week by 25bp to 0.5%, a widely expected move that brought it to the highest level since 2008. The 10y JGB yield increased as well to 1.23%, and inflation projections of the central bank were revised higher (which current data releases confirm) – which will likely mean more hikes in the course of this year. Nevertheless, the major stock indices were up, supported by positivity around the non-announcement of US trade tariffs. Chinese stocks were also positively impacted by that, as well as by the decision of Chinese banks to keep the 1y and 5y loan prime rates unchanged. However, the expectation is that later this year, the easing will continue and more rate cuts will be implemented, especially if Trump’s policy changes significantly. The Financial Times published data this week, that could be worrying for investors – 30% of respondents to a survey by the American Chamber of Commerce in China are considering an exit from the country and looking for alternatives in fear of the potential effects of the new US administration’s tariffs.

– BITCOIN: As the new $TRUMP and $MELANIA coins took a significant dive this week, erasing billions of their capitalization within days and causing significant losses for many retail investors, BTC actually kept steady. It mostly fluctuated around the $104k level. However, several developments could have a positive impact on its future price trajectory. Even though no specific plans for a Strategic Bitcoin Reserve have been made yet, it was announced US Sentaro Cynthia Lummis, a long-term supporter of crypto, will become chair of the Senate Banking Subcommittee on Digital Assets. It is expected to push for a strategic digital asset framework to boost financial innovation. The US President’s Son, Eric Trump, commented publicly that US-based crypto projects will have no capital gains taxes (while for non-US crypto, there will likely be 30% capital gains tax). Major US banks also indicated that they are ready to start working more closely with US regulators to examine whether they can deepen their involvement in the cryptocurrency markets. This was accompanies by news that the US Securities and Exchange Commission (SEC) has rescinded a staff accounting bulletin (SAB) guidance, which required companies holding crypto on behalf of customers, like banks and crypto platforms, to include those assets on their balance sheets. Its intention was to address the risks of digital currencies association, theft, misuse, or losses from market volatility. Significant capital requirements contained in the SEC’s SAB 121 effectively precluded banks from being able to offer digital asset custody services – this will now change considerably. The acting chairman of the SEC also launched a “Crypto Task Force” to develop a comprehensive and clear regulatory framework for crypto assets.