Weekly Overview 17. – 23. 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: There was mixed stock market performance across major markets, with Italian, Swiss and Stoxx 600 indices gaining this week, while the DAX, the CAC 40, the FTSE 100, and the Stoxx 50 declined. The flash PMI indices remained in expansion territory in February, but only barely. Overall business activity rose again in Germany but contracted in France. The rest of the Eurozone was also in expansion. This growth is still driven by the service sector while manufacturing output keeps falling. According to the PMI responses, demand is still weak, with new orders in decline, including from abroad. Employment fell at a faster pace in February. The signs for a potential turnaround in the German manufacturing sector, which had been hit particularly hard, are already there, but it is too early to call that a recovery given the likely negative impact of the upcoming US tariffs. The policy of the new German government which is to be elected this Sunday will be crucial for supporting such a recovery in the following years. Notably, output price inflation is picking up in the Euro area, while in Germany it is still decelerating so far. In the UK, manufacturing production is falling and it is offset by a stronger performance in the service sector, but overall output is only marginally rising. CPI data showed that UK inflation re-accelerated more than expected in January, driven by higher transport costs and rising food and nonalcoholic beverage prices. Services inflation was also up. As a result, markets have repriced their bets and are now expecting only 3 rate cuts by the Bank of England in the course of 2025. Consumer confidence in the UK, as well as retail sales, performed positively in February and January, respectively. The euro depreciated while the pound appreciated vs. the US dollar this week, but the outcome of the German election and the relative performance of the far right versus expectations is likely to have an impact next week. Additionally, European defense stocks have become very attractive for investors given the latest statements by the US administration and the rising expectation in Europe that the US might withdraw from the North Atlantic and shift its attention instead to the Indo-Pacific to address the risks of China’s military presence. Data compiled by Bloomberg shows the number of defense-themed funds doubled last year to a record 47, following decades during which such products — if they existed at all — were only to be found in the single digits. In the EU, various meetings are taking place and governments as well as the European Commission are pledging major hikes in defense spending and discussing new funding models to pay for it. An estimate by Bloomberg for the additional cost to European militaries for Ukraine’s defense stands at $3.1 trillion over the next 10 years. Commission President von der Leyen will present a comprehensive plan next month that is set to include incentives for investors.

– UNITED STATES: This week there were concerns that surfaced among investors regarding the course of the US economy. It is being affected by the major spending cuts and layoffs undertaken by Elon Musk’s Department of Government Efficiency (DOGE), as well as the geopolitical reorientation of the United States under President Trump and its potential effect on sentiment. Defense spending cuts appear to be in the works, which, combined with the effects of tariffs, could lead to a slowdown in GDP growth. Inflation fears have spiked, while consumer sentiment and indices of business conditions have dropped. In the housing sector, builder’s confidence is also on the decline, and housing starts plunged nearly 10% seasonally-adjusted in January. PMIs by S&P Global show that business activity growth almost came to a halt in February, with the service sector reporting a contraction. According to the report, uncertainty related to government policies and increasing input cost pressures were the main causes of the overall decline. The three main stock indices dropped this week, and so did US 10y yields. One notable announcement was Microsoft’s new breakthrough – a quantum chip called Majorana 1, which the company claims could make machine mightier than all the world’s current computers combined due to its ability to harness the properties of an elusive material called a topological superconductor yielding particles that are neither a liquid nor solid nor a gas (a “new state of matter”). While there is a race between companies like Google, Microsoft, IBM, Intel and others to develop quantum computing and enable it to solve immense problems at much faster speeds, it is still early days and only time will show the true potential of such technology.

– ASIA-PACIFIC: Japan’s Nikkei 225 and TOPIX indices finished the week lower as the yen kept appreciating against the US dollar and 10y JGB yields rose to the highest level (1.43%) since the financial crisis. Inflation and GDP both accelerated more than expected. BoJ Governor Ueda stated that the central bank stands ready to ramp up its JGB purchases if long-term yields increase more rapidly in order to stabilize the market against abnormal moves. In China, stocks were lifted by tech optimism as the country’s tech giants (such as Alibaba) reported better-than-expected earnings results. The meeting between the president and tech CEOs and founders also helped as it showed that the government is becoming more supportive of such business ventures. Nevertheless, investment flows to China continue to slow down significantly and a potential trade war with the US could become a further drag on the economy in the coming years.

– BITCOIN: As of the time of writing, BTC is hovering around the $95.5k mark, but it had quite a volatile week, ranging between $93k and $99k. Some analysts point out that it may be stuck in a range for a while, at least until a more significant catalyst for a surge or a plunge shows up. It looks like the crypto options market is waiting for concrete policy changes rather than just pro-crypto rhetoric by the government in order to take a strong position on either side. This is also likely the reason why implied volatility has been getting more and more compressed.