Weekly Overview 3. – 9. Mar 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: Despite the weekly decline in the STOXX 600 and the FTSE 100, most other major equity indices in Europe advanced week-on-week. One of the major drivers was likely the expected ECB decision to cut policy rates further. Another one was the announcements by the European Commission and the future governing coalition in Germany that public spending on defence and infrastructure will go up significantly. And that is not an exaggeration – the sums are quite a substantial departure from fiscal prudence on both EU and German levels. EC President Ursula von der Leyen announced a ReArm Europe plan which involves five major components – (1) the additional defence expenditure will not count towards or trigger the Excessive Deficit Procedure; (2) there will be a €150bn pan-European loans for air and missile defence, artillery systems, missiles and ammunition drones and anti-drone systems, as well as cyber and other needs; (3) directing more funds from the EU budget to defence-related investments; (4) mobilizing private capital by accelerating the Savings and Investment Union; and (5) funds through the European Investment Bank (EIB). That is a total package of up to €800bn. Germany alone is planning to ease the restrictions around the constitutional debt brake when it comes to defence spending. €500bn of debt will be used for defence and another €500bn will be used to create a special fund for industrial and infrastructure investments (over 10 years), which could significantly stimulate growth of the German economy over the next decade. As a result of these announcements, European stocks gained during the week, while euro area and German yields spiked, rising to levels not seen since 2023 (30-year German yields had their biggest 1-day surge since the late 1990s). This is what they call a “really big bazooka” and is expected to create enormous investment opportunities on the Old continent – a major shift from where markets were going just a few weeks ago, with US “exceptionalism” driving equities. Both the euro and the British pound appreciated quite substantially against the US dollar.

– UNITED STATES: The drop in the major US stock indices continued this week as well. This time, on a sector basis, the declines extended to almost everything, within the S&P 500 it was everything but Utilities with Consumer Discretionary and Financials leading the way down. The stock market could continue to decline in the coming months as the second Trump administration whipsaws its decisions to impose and postpone tariffs, raising significantly trade policy uncertainty and spooking investors in the process. This Friday, in his speech, Fed chair Powell indicated that the central bank was comfortable maintaining its current stance on interest rates as it observes how the new tariffs would affect the economy, without rushing decisions. This was despite the disappointing labor market data – i.e., the less-than-expected numbers of jobs added and the increase in the unemployment rate. The figures will likely get much worse in the coming months as the DOGE government employment cuts feed into the data. The Fed might proceed with rate cuts once a further weakening in the labor market and a decline in inflation allow it to. One thing is sure – US companies are worried about tariffs. FactSet reported that the biggest number of S&P 500 companies cited tariffs in their earnings calls – and the ones with the biggest EPS estimate cuts are also in the sectors with the highest uncertainty (Materials, Industrials, Consumer Discretionary, and Consumer Staples). The ISM PMI indices show that activity in the manufacturing sector slowed in February while costs increased and employment contracted, as the new trade policies weighed on the sector. Major retail store chains also started announcing likely price increases as a result of the tariffs. Furthermore, the prospect of the United States abandoning the existing international rules-based order altogether and shifting very dramatically to favor foreign dictatorships while withdrawing from supporting its allies and instead antagonizing them, is causing shockwaves across the world and could prove to be the biggest geopolitical risk over the next 4 years (or more). We have seen allusions to redrawing borders with Canada by abandoning agreements existing for centuries, threats to send military forces to intervene directly in Mexico in the fight against the cartels or to acquire Greenland “one way or another”, ideas to take troops out of NATO and scale-back US presence and protection umbrella in Europe (with powerful supporters such as Elon Musk), etc. Aid to and intelligence sharing with Ukraine have been suspended, while Russia has been threatened with sanctions and tariffs – all so that both sides can come to the negotiating table, albeit only one side has the advantage. Donald Trump’s view seems to be that it is appropriate that there be spheres of influence in the world, with Europe somehow belonging to Russia’s – and that raises questions whether a similar view is held with respect to China and South-East Asia. As the Wall Street Journal points out, European nations taken together are America’s largest trading partner, and the largest source of foreign investment into the US – in fact, US Treasury Department data show that European investments in the US are about twice as much as US investments in Europe. But if this transatlantic relationship keeps being tested in such ways, investment flows can and will shift dramatically.

– ASIA-PACIFIC: Japan’s Nikkei 225 went down, while the TOPIX stock index advanced week-on-week. One of the major drivers was the US tariff policy (announcements and pullbacks by the Trump administration). The yen appreciated further against the US dollar, reaching below the 150 mark, while the yield on the 10-year JGB rose to the highest level since the financial crisis (1.53%). As long-term deflation indicators have moved to positive territory, the Bank of Japan (BoJ) is now more likely to continue its rate hikes. In China, there will be more government stimulus to achieve growth targets and respond to the escalating trade tensions with the US. Major stock indices rose this week, as the national congress set a growth target of 5% for 2025, with a fiscal deficit target of about 4% of GDP and an annual inflation target of about 2%. In India, a report by CRISIL (part of S&P) states that India’s real GDP growth is expected to remain steady at 6.5% in 2026 despite the geopolitical shifts and tariff shocks, conditional on normal monsoon patterns and soft commodity prices. CRISIL expects that these factors, coupled with cooling food inflation, tax benefits outlined in the Union Budget 2025-2026, and lower borrowing costs, will stimulate discretionary consumption. Rural and urban demand, which drive consumption, will be crucial for the short-term growth development, while continuing investments and efficiency. gains will support the medium term perspective.

– BITCOIN: BTC fluctuated mainly within the $82k-$93k range this week, hovering around the $86k mark as of the time of writing. Perhaps the most significant event in the crypto space this week was the Crypto Summit hosted by the US President and his White House crypto czar David Sacks. It focused on the creation of a government-owned stockpile of digital assets – the so-called crypto reserve. It was revealed that this will not be done using taxpayer money to acquire new units of digital assets but rather with existing government holdings, which was met with disappointment by some market participants. There were also not that many details on how the reserve would work, despite the firm support for it and the crypto industry expressed by the President and the participants. US regulators overseeing national banks clarified on Friday that banks can engage in some crypto activities (such as crypto-asset custody, certain stablecoin activities, and participation in distributed ledger networks) and that advance permissioning for doing so will not be required.

policy rate overview

The European Central Bank (ECB) cut its policy rates by another 25bp this week, in line with expectations. The deposit facility rate is therefore set at 2.5% starting from March 12th, the main refinancing operations rate will be 2.65%, while the marginal lending facility will be 2.9%. The ECB no longer considers the current monetary policy stance restrictive – it is now “meaningfully less restrictive”, which clearly signals that the rates might already be around neutral territory and that the next step might be a pause, without precluding further cuts. ECB President Lagarde was quite explicit in highlighting the high level of uncertainty in which it is operating now. That is also reflected in the staff projections – with ECB growth revised downwards for 2025 and 2026 (0.9% for 2025, 1.2% for 2026, 1.3% for 2027) and upward revisions to 2025 inflation (2.3% for 2025, 1.9% for 2026 and 2% in 2027). These forecasts did not yet reflect the latest developments (i.e., the fiscal boost on EU and German level for defence spending) but together with the US tariffs, these are likely to be the two most significant factors impacting the future rate path.