Weekly Overview 10. – 16. Feb 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: Several positive surprises likely contributed to the positive equity market performance this week. Both the Euro area (according to the second estimate) and the UK (according to preliminary data) seem to have returned to growth in Q4 2024, despite further declines in industrial output at the end of the year. Additionally, the prospect of a potential peace deal as a result of upcoming meetings between the US and Russia and good corporate earnings performances seem to be boosting investor confidence. The Chief Economist of the Bank of England commented that caution is required when it comes to rate cuts in light of strong pay growth. In Germany, inflation continues to decelerate and is now down compared to December. However, Donald Trump hinted on Friday that the next round of tariffs coming in April is likely to include tariffs on automakers, affecting Germany’s large car manufacturers quite significantly. The biggest impact is expected to be on Volkswagen, whose US sales are 80% imports. Next in line will probably be Mercedes Benz with 63% of US sales consisting of imported cars, and BMW with 52% imports. The scope, rates and impact on cars produced under the free trade agreements are not yet clear but industry trade groups have reportedly already warned of price hikes and supply chain disruptions due to such tariffs. The pound and the euro both appreciated more significantly this week against the US dollar, while 10y yields on German and UK government bonds rose slightly.

– UNITED STATES: Inflation data for January confirmed that holding rates at a high level was the right approach for the Fed to take for now. The headline CPI increased 3% YoY and 0.5% MoM, with shelter costs contributing about a third of that rise. Core CPI climbed 3.3% YoY and 0.4% MoM, again accelerating compared to December. Producer prices were also up more than expected, although the rise was slowing for some components of the PPI. In Fed Chair Powell’s testimony in front of the Senate Banking Committee, he mentioned that the central bank needs to stay restrictive for the time being. As a result, the futures markets readjusted and are now pricing a higher probability for a December rather than a September rate cut, while the CME FedWatch tool points to the next cut likely taking place at the end of July. Treasury yields rose in reaction to the inflation data release but then declined again before the end of the week. The three major stock indices finished the week higher compared to last week, with growth stocks performing better than value stocks. Overall in this earning season so far, the Magnificent 7 have underwhelmed and the defensive sectors have beaten sales estimates more than cyclical sectors, with the price reaction to earnings-per-share misses being quite punishing. Something to keep an eye on, especially in the expectations for future performance, is that the guidance is also seemingly weaker. Additionally, the tariff threats have certainly not receded – the US president signed an executive order and made it clear that by April 1st, there will be reciprocal tariffs on a country-by-country basis (with some leeway for negotiations likely still on the table). Retail sales, while still up YoY, declined MoM compared to December – and by more than expected. Americans did not rush to stockpile products ahead of the tariffs coming into force but rather were most likely influenced by the cold weather. The decline was quite notable at auto dealers, furniture stores, home and garden centers, as well as online retail stores.

– ASIA-PACIFIC: Major Japanese stock indices rose this week, likely supported by a weakening in the yen, lack of clarity on the US reciprocal tariffs (including concerning Japan), and ongoing uncertainty about the future BoJ interest rate hikes. JGB 10y yields increased and the index of input prices accelerated more than expected, strengthening the case for further hikes. In China, both the CSI 300 and the Shanghai Composite also gained week-on-week. Inflation might be picking up as the consumer price index accelerated a bit, however, producer prices continue to drop. It is reported that Chinese President Xi Jinping will meet some of the country’s top entrepreneurs, including AI start-up DeepSeek’s founder. The expectation is that the Chinese leader might indicate its goal to take a more supportive stance toward domestic private-sector firms. Further, as the US President stated that he will be taking aim at other countries’ Value Added Tax (VAT) systems and treating the tax equivalently to a tariff, Beijing is planning to reply in kind to any US action it views as a protectionist measure or a bargaining chip. Academics point out that one possible measure would be scaling back imports of American agricultural goods or aircraft given the alternatives available from other countries.

– BITCOIN: The largest cryptocurrency fluctuated somewhat against the dollar this week, dropping below $95k at some point, and finishing the week around the $97k mark around the time of writing. The biggest news that came in this week was probably the decision of El Salvador, the first country to adopt Bitcoin as legal tender on a national level, had to make changes to its Bitcoin law in order to comply with an IMF requirement linked to $1.4bn loan from the institution. According to this amendment, the law no longer classifies Bitcoin as a currency and makes it a “voluntary legal tender”. So while local businesses can accept Bitcoin for payments, it is prohibited to make tax payments and essentially all other government fee payments using BTC. The amendments also stipulate that the state should not facilitate BTC transactions, which can probably lead to the shutdown or sale of El Salvador’s state-run crypto wallet Chivo. There are signs that the White House crypto force and the Crypto Council are preparing a market-shifting overhaul and it’s been said that “some important announcements are coming soon”, but it is not yet clear what that would involve.