Weekly Overview 10. – 16. Mar 2025

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The Week in Global Markets

FINANCIAL MARKETS SUMMARY:

– EUROPE: European stocks reacted negatively this week to the escalation of trade war threats coming from the US. While interest rates continue to present a challenge for growth in the euro area, the ECB appears to be turning more hawkish in its messaging, pointing to high levels of uncertainty ahead in hitting the 2% inflation target in the near term and implying that the next step could be a pause in rate cuts. In Germany, the conservatives, the social democrats and the Greens agreed on a deal to modify the debt brake and push forward with a major public spending package, designed to support infrastructure and defence funding. Industrial output in Germany and the Eurozone as a whole rebounded in January. Nevertheless, German exports shrank again, bringing the trade balance down to €16bn (surplus), a figure that was below expectations for January. The driver was a decline in exports to the Euro area and EU countries, the US, and China. The GDP growth figures for January confirmed that the UK economy is still struggling to return to a more sustainable growth trajectory and is likely stagnating in the beginning of the year. German and UK 10y yields are still on the rise, although by less compared to last week. Both the euro and the pound kept appreciating a bit against the US dollar this week, although this dynamic might be turning as the development in the second half of the week suggests. Going forward, the tariff wars and other protectionist measures are likely to keep having a major impact, especially around April 2nd when the new round will be announced by the US administration, likely also hitting auto exports from the EU, which would be a major blow.

– UNITED STATES: US equities have now technically entered correction territory. Despite a little Friday rebound, $5tn of market cap has been wiped out from the US stock market since the February highs. This has been a fourth week in a row where the Nasdaq, the S&P 500 and the Russell 2000 have declined. High yield spreads have now begun to widen as well, which signals that the rise in investor pessimism is likely not yet about to recede. Overall, corporate yield spreads over Treasuries reached their highest since September this week, which is likely an indicator that investors expect this trade war to lead to a recession. Investment grade spreads went up to 94bp, while high-yield spreads spiked to 322bp, meaning that stress in financial markets is on the rise. The US president himself stated that the new economic policy will be associated with a “period of transition” that will cause some “disturbance” along the way – and that impacts sentiment as well – as the consumer sentiment survey by the University of Michigan confirms. The confidence index is down 11% MoM (and 22% down since December), expectations have deteriorated with regard to personal finance, labor markets, business conditions and the stock market, and inflation expectations have reached 4.9% for 12m ahead, also rising for the 5y horizon. The good news is that the February CPI inflation data shows cooling in both the headline and core indices. Nevertheless, the inputs into the Feb numbers are mostly from before the tariff hikes of the US administration, which is why the uncertainty around the path of inflation is still quite high. Headline and core producer price prints (PPI) pointed in the same direction, but since the PCE index is expected to remain above 2%, and therefore, next week the Fed is expected to make no further fed funds rate moves. According to last week’s Bloomberg survey of economists, the expectation is that there will be two 25bp rate cuts later this year, starting in September.

– ASIA-PACIFIC: Japan’s Nikkei 225 and TOPIX indices advanced a bit this week as the yen depreciated a little against the US dollar, returning to nearly 149. There is still uncertainty that concerns investors as Japan may soon be in Donald Trump’s crosshairs when it comes to tariffs on autos – one of the largest components of the country’s exports to the US. The yield on 10y JGBs is still stuck at an elevated 1.5% level and BoJ governor Ueda has stated that if yields rise abnormally, the central bank is ready to support with bond purchases to cap them. In China, it is expected that on Monday policymakers might announce a new round of consumption-related stimulus measures. The goal is to support economic growth and counteract deflation, especially in light of the trade war with the US. The CSI 300 and the Shanghai Composite both gained week-on-week, while the Hang Seng index declined. In India, the main indices kept moving in narrow ranges, ending the week lower compared to last week. Foreign capital outflows continued and the market consolidation will likely keep going.

– BITCOIN: The largest cryptocurrency ended the week slightly higher compared to last Sunday, currently around the $83k level. Bitcoin has reacted to tariff wars and economic slowdown concerns in a similar way to stocks – and has switched into a “risk-off” mode. Of course, bulls continue to see a major recovery ahead, as BTC finished this correction typical of most long-term bull markets, and expect a seasonal rebound to over $120k. Whether or not these projections pan out – only time will tell – but its price action around the FOMC this week will be a telling sign about the potential downside volatility going forward. In these moves, technical analysts see the range around the $81k level as key, and moving below $76k could trigger more selling pressure.