Omnis Weekly Market Update – 13th January 2025
Last week’s performance – major stock markets
S&P 500 | -1.92% |
Nikkei 225 | -1.76% |
CSI 300 | -6.59% |
Euro Stoxx 50 | 2.32% |
FTSE 100 | 1.61% |
Last week, data confirmed a continuation of a positive economic trend in the US. December labour market surprised to the upside. Wage gains continue to outpace inflation rates, which is a positive for consumers and investor sentiment towards the region. However, US equities delivered a negative return over the week, with the S&P 500 falling 1.9%, but why, when data suggests that the country is doing well economically?
Although the jobs report was positive, the reaction in the financial markets was largely negative after this news. This was in part because markets are reassessing the need for further central-bank interest rate cuts. In fact, according to Bloomberg, markets now expect just one more interest rate cut in 2025, in the July meeting, which would bring rates to 4.25%. As a result, government bond yields moved higher last week (meaning prices fell), and stock markets declined. Higher interest rates may put pressure on current high valuations of US stock markets and spark some bouts of volatility.
In addition to the economic data and central-bank rate cuts, investors also have their eye on the shift in political regimes occurring in both the U.S. and Canada.
In the U.S., Inauguration Day is less than two weeks away, with President-elect Trump taking the oath of office on January 20. While the incoming administration has highlighted several policy initiatives – including tariffs, immigration and energy reform, deregulation and tax cuts – it remains to be seen which of these are prioritised in the weeks ahead.
The uncertainty around which policies are prioritised, and in what order, may continue to remain an overhang on markets. If the administration focuses on some of the more potentially inflationary policies first, like tariffs and immigration reform, this could be more disruptive for markets. However, if these are balanced with pro-growth initiatives like deregulation and tax cuts, we could also see a more balanced outcome in markets. Overall, though, the removal of this policy uncertainty alone may be welcomed by the markets, regardless of the initiatives that are prioritised.
On January 6, Canadian Prime Minister Justin Trudeau announced that he will resign as prime minister and leader of the Liberal Party once a suitable replacement has been chosen to succeed him. With that announcement, he also suspended Parliament until March 24. While there is ongoing uncertainty in the political backdrop across a few major regions, now is a good reminder that financial markets tend not to be driven by politics and headlines, but by fundamentals. Staying invested and riding through bouts of volatility is paramount to an investment approach, often some of the best periods in financial markets follow the low periods, by disinvesting and trying to time the market, you may miss out on a recovery.
In the UK, the Treasury tried to calm markets and reaffirmed its commitment to fiscal rules after a fall in the pound and UK government bonds. Equity markets delivered a positive return of 1.6% over the week, however the yield on a 10-year gilt moved higher to 4.8%, the highest level since August 2008, this means that prices of gilts fell over the week. The move reflected a broader increase in bond yields stoked by concerns over President-elect Donald Trump’s policies and the outlook for potentially higher for longer U.S. interest rates that we discussed. Mounting investor concerns about the UK’s debt levels and the Labour government’s ability to shore up the public finances while implementing budget plans added to the downward pressure on gilt prices. We expect UK markets to remain fragile this week, not only due to investor concerns over government fiscal positions, but as we head into Wednesday’s inflation data release. Global bonds have performed poorly since early December, but gilts have emerged a particularly weak link.
Elsewhere, Chinese stocks fell over 6% as data showed that the economy remained stuck in deflation. Japanese stocks fell 1.8% as the market remains concerned over the regions interest rate outlook. And in Europe stocks gained 2% as inflation progress continued.