The new year has started strongly across financial markets, with equities, bonds, and alternative investments all delivering positive returns. A weakening sterling provided an additional boost to international holdings for UK investors, adding to the strong start.
European equities led the way, gaining over 8% in January, despite ongoing political uncertainty in France and Germany and persistently weak economic data from Germany, the Eurozone’s largest economy. Investor optimism appears to be driven by the potential for the European Central Bank (ECB) to cut interest rates. They proceeded with a rate cut at the end of the month to 2.75%, and the market is factoring in further cuts to 1.75% by year-end. European markets have also been buoyant since Trump’s return as there seems a greater possibility to the end of the conflict in Ukraine.
In the United States, the return of Donald Trump to the White House has added a new layer of complexity to the economic outlook. His administration’s early policy proposals, including tax cuts, tariffs, and immigration restrictions, have already influenced market sentiment. Inflation in the US unexpectedly rose to 3% in January, up from 2.9% in December, driven by rising food and energy prices. The market is now starting to question the Federal Reserve’s ability to cut interest rates going forward. We have seen a strengthening the dollar and government bond yields have increased.
At the same time, the rapid emergence of DeepSeek (a large language model from China) has sent ripples through the technology sector. This new Artificial Intelligence (AI) model appears capable of delivering responses on par with established American models, such as OpenAI’s ChatGPT and Meta’s Llama, but at a fraction of the cost. By optimising computational efficiency, DeepSeek has bypassed the need for the vast processing power and financial resources that have traditionally dominated the sector. While there are still questions about its underlying costs and data sourcing, the development suggests a shift in the competitive landscape, one that could have lasting implications for the AI industry and the broader technology market.
Despite a UK budget that was poorly received and early signs of a government struggling to gain momentum, UK equities mirrored global trends, posting gains of over 5%. The FTSE 100 reached record highs, supported by a sector rotation into traditional areas such as energy and mining, which are a large part of the FTSE 100 index, following DeepSeek’s disruptive impact on the technology sector.
Bond markets experienced positive returns in January but with increased volatility. Concerns over Trump’s policy agenda, particularly inflationary pressures linked to tax cuts and tariffs, led to a rise in US bond yields. However, despite these fluctuations, bonds still managed to deliver modest gains. Meanwhile, commodities performed strongly, returning over 5% for the month. Gold and industrial metals rallied on renewed tariff concerns, while oil prices climbed due to continued sanctions on Russian exports and increased demand driven by colder weather.
Economic indicators globally have presented a mixed picture. China’s consumer price index rose by 0.5% year-on-year in January, marking its fastest pace in five months, largely due to increased spending during the Lunar New Year holiday. However, the manufacturing sector continued to struggle, with producer prices remaining weak. In the US, job creation slowed, with employers adding 143,000 jobs in January, falling short of expectations. Despite this, the unemployment rate declined to 4%, and wage growth remained strong, with average hourly earnings increasing by 0.5% from December and 4.1% year-on-year. These factors could add to inflationary pressures in the coming months.
Looking ahead, the economic environment looks uncertain, shaped by political developments, monetary policy shifts, and technological disruptions. Trump’s policies are likely to add further concerns, while advances in artificial intelligence and their potential impact on corporate profitability will continue to be a key theme for investors. Investors may shift their focus away from the big technology giants that have dominated markets over previous months, and perhaps focus on other areas that will be beneficiaries of these technology improvements. As always, there will be opportunities for those who can navigate these evolving dynamics with a selective and strategic approach.
20th February 2025
Cappuccino Commentary
A relaxed read on the issues of the day
The new year has started strongly across financial markets, with equities, bonds, and alternative investments all delivering positive returns. A weakening sterling provided an additional boost to international holdings for UK investors, adding to the strong start.
European equities led the way, gaining over 8% in January, despite ongoing political uncertainty in France and Germany and persistently weak economic data from Germany, the Eurozone’s largest economy. Investor optimism appears to be driven by the potential for the European Central Bank (ECB) to cut interest rates. They proceeded with a rate cut at the end of the month to 2.75%, and the market is factoring in further cuts to 1.75% by year-end. European markets have also been buoyant since Trump’s return as there seems a greater possibility to the end of the conflict in Ukraine.
In the United States, the return of Donald Trump to the White House has added a new layer of complexity to the economic outlook. His administration’s early policy proposals, including tax cuts, tariffs, and immigration restrictions, have already influenced market sentiment. Inflation in the US unexpectedly rose to 3% in January, up from 2.9% in December, driven by rising food and energy prices. The market is now starting to question the Federal Reserve’s ability to cut interest rates going forward. We have seen a strengthening the dollar and government bond yields have increased.
At the same time, the rapid emergence of DeepSeek (a large language model from China) has sent ripples through the technology sector. This new Artificial Intelligence (AI) model appears capable of delivering responses on par with established American models, such as OpenAI’s ChatGPT and Meta’s Llama, but at a fraction of the cost. By optimising computational efficiency, DeepSeek has bypassed the need for the vast processing power and financial resources that have traditionally dominated the sector. While there are still questions about its underlying costs and data sourcing, the development suggests a shift in the competitive landscape, one that could have lasting implications for the AI industry and the broader technology market.
Despite a UK budget that was poorly received and early signs of a government struggling to gain momentum, UK equities mirrored global trends, posting gains of over 5%. The FTSE 100 reached record highs, supported by a sector rotation into traditional areas such as energy and mining, which are a large part of the FTSE 100 index, following DeepSeek’s disruptive impact on the technology sector.
Bond markets experienced positive returns in January but with increased volatility. Concerns over Trump’s policy agenda, particularly inflationary pressures linked to tax cuts and tariffs, led to a rise in US bond yields. However, despite these fluctuations, bonds still managed to deliver modest gains. Meanwhile, commodities performed strongly, returning over 5% for the month. Gold and industrial metals rallied on renewed tariff concerns, while oil prices climbed due to continued sanctions on Russian exports and increased demand driven by colder weather.
Economic indicators globally have presented a mixed picture. China’s consumer price index rose by 0.5% year-on-year in January, marking its fastest pace in five months, largely due to increased spending during the Lunar New Year holiday. However, the manufacturing sector continued to struggle, with producer prices remaining weak. In the US, job creation slowed, with employers adding 143,000 jobs in January, falling short of expectations. Despite this, the unemployment rate declined to 4%, and wage growth remained strong, with average hourly earnings increasing by 0.5% from December and 4.1% year-on-year. These factors could add to inflationary pressures in the coming months.
Looking ahead, the economic environment looks uncertain, shaped by political developments, monetary policy shifts, and technological disruptions. Trump’s policies are likely to add further concerns, while advances in artificial intelligence and their potential impact on corporate profitability will continue to be a key theme for investors. Investors may shift their focus away from the big technology giants that have dominated markets over previous months, and perhaps focus on other areas that will be beneficiaries of these technology improvements. As always, there will be opportunities for those who can navigate these evolving dynamics with a selective and strategic approach.
This information is intended for professional financial advisers only. Copia does not provide financial advice. This information is not intended as financial advice and should not be interpreted as such.