Market Update - February 2025
Welcome to the February edition of the Market Update
Market Key Points
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The Australian equity market was stronger over the month returning 4.6% and following a positive lead from most developed markets.
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The S&P 500 Index (USD) finished the month higher by 2.8%.
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Asian markets by contrast, in particular the Nikkei 225 Index (JPY) and CSI 300 Index (CNY), finished the month weaker.
Australian Equities
The ASX 200 Accumulation Index gained 4.6% in January, hitting an all-time high of 8,566.9 points on January 31st, marking the best month for the Index since December 2023.
Ten of the eleven sectors returned gains over the month, led by Consumer Discretionary (+7.1%) and Financials (+6.1%). Other strong performers included Property (+4.7%), Information Technology (+4.2%), and Materials (+4.0%). The only sector with negative returns was Utilities, which finished down 2.4%.
The market’s hopes for an interest rate cut from the Reserve Bank of Australia (RBA) increased due to progress on inflation and a narrowing of inflationary pressures. This optimism helped Consumer Discretionary stocks bounce, as expectations of increased expenditure on non-essential items heightened. Financials also benefited from the rate-cut expectation, under the assumption of increased lending and interest income. All the “Big 4” Banks gained strongly, while they all expect a cut in interest rates at the February RBA meeting.
The ASX 200 got off to a strong start in 2025. With the market giving a 95% chance of the RBA lowering rates in February, returns in January were broad and deep.
Global Equities
2025 opened on a tumultuous note, with investors reacting to executive orders from US President Donald Trump in his first days back in power, a Middle East ceasefire and disruption from Chinese AI company DeepSeek. Nonetheless, equity markets made a solid start, with Developed Markets outperforming Emerging Markets in January, driven by positive earnings surprises, central bank support and easing inflation.
Developed Markets gained 2.74% (MSCI World Ex- Australia Index (AUD)) versus a 1.04% return (MSCI Emerging Markets Index (AUD)).
US markets posted solid gains, with the S&P500 rising 2.8% and the Nasdaq Composite up 1.7% (in local currency terms). Cooling core inflation and strong earnings, especially in financials and consumer discretionary sectors, lifted sentiment. However, volatility emerged as the Trump administration announced new tariffs on imports from Mexico, Canada and China, with uncertainty lingering as negotiations over their implementation continue. Meanwhile,
DeepSeek’s low-cost AI model triggered the largest single day sell-off in US stock market history, wiping $589 billion off Nvidia’s market value.
Europe led global markets, with the MSCI Europe ex- UK Index up 7.1%, driven by gains in financials, consumer discretionary and technology stocks. Earnings upgrades and the European Central Bank’s 25 basis point rate cut supported sentiment. In the UK, the FTSE 100 rose 5.5%, benefiting from a weak sterling that boosted overseas revenues.
Japanese equities underperformed, with the Nikkei 225 declining -0.8% (in local currency terms), weighed down by a stronger yen, US tariff concerns and the Bank of Japan’s third 25 basis point hike in interest rates. The export-heavy economy continued to face headwinds amid global trade uncertainty.
Emerging Markets posted modest returns, with the MSCI Emerging Markets Index (AUD) up 1.04%. Chinese equities lagged, with the CSI 300 Index up 0.64% and the Hang Seng Index rising 1.2% (in local currency terms), held back by weak PMI data and geopolitical concerns. Latin America was the standout performer, with the MSCI LatAm Index rising 7.6%, driven by strong investor inflows into Brazil and Chile amid currency appreciation.
Property
The S&P/ASX 200 A-REIT Accumulation Index TR started the year off strong, finishing up 4.65% for January. Over the previous 12 months the index is up 22.41%. Global real estate equities also moved higher, increasing by 1.47% (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)). Australian infrastructure increased with a return of 1.19%.
January continued the quite M&A trend in Australia across the A-REIT sector post the holiday period.
However, some development from the Charter Hall Retail REIT(CQR)ledconsortiumastheynotifiedHotel Property Investments (HPI) that the A$760m takeover offer has been extended to March 2025. Additionally, GPT Group (GPT) has formed a partnership with the GPT Wholesale Shopping Centre Fund 1 for Rouse Hill Town Centre. GPT will also acquire an 8.33% stake in HighpointShoppingCentre,increasingitsownershipto 25%, pending approval.
The Australian residential property market experienced a flat month with no change in values Month on Month for January (as represented by CoreLogic’s five capital city aggregate). Adelaide valuations continued to rise (+0.7%), followed by Darwin (+0.6%). In contrast, Melbourne was the worst performer and continued to experience a fall in value (-0.6%) alongside Sydney (- 0.4%), and Canberra (-0.5%). Perth’s notably strong performance began to slow in January, rising (+0.4%).
Fixed Income
Bond markets experienced notable volatility in January, though overall movements were relatively modest by month-end.
In the US, the 10-year Treasury yield ended the month down slightly (-2bps) at 4.55%, though this masked significant intra-month swings with the 10-year having spiked to 4.79% on stronger economic data, including the highest non-farm payrolls report in nine months, before retracing.
In Australia, government bond yields rose by 6bps to 4.43%withsoftdomesticdatalimitingthemovehigher somewhat. The market started to price in a February rate cut by the RBA leading to a steeper yield curve.
Looking ahead, market sentiment remains sensitive to central bank guidance and incoming economic data.
Economic key points
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Australian annual headline inflation growth slowed to 2.4% in December
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The Fed left interest rates at 4.50% in its January meeting.
Australia
Headline inflation growth slowed to +2.4% for the year to December, down from +2.8% to September. The trimmed mean inflation rate eased to +3.2% from +3.6%, approaching the edge of the RBA’s 2-3% target range. As a result, financial markets have priced in a greater than 90% probability for the first local rate cut to be in February, with two further cuts expected before the end of the calendar year.
Unemployment came in at 4.0% in December, matching market estimates.
Retail sales fell 0.1% in December, but well below the forecast -0.7%. Annual sales increased 4.6%, up from the 3.1% rise in November.
The Westpac-Melbourne Institute Consumer Sentiment Index dropped 0.7% % to 92.1 in January reversing the gains of the previous month. The survey results weakened toward the end of the period, likely in response to news about the Australian dollar’s depreciation against the US dollar.
Composite PMI rose to 51.1 in January, with both services and manufacturing output growing for the first time since late 2022.
The trade surplus narrowed to $5.09bn in December, below of market estimates of $7bn.
US
The US Federal Reserve left interest rates on hold in its January meeting and commentary from Chairman Jerome Powell emphasised that policyholders do not feel urgency for further monetary easing. GDP expanded 2.5% year-on-year in the fourth quarter of 2024, slowing slightly form a 2.7% rise in the previous period.
Consumer sentiment fell to 67.8 in February from 71.1 in January and below forecasts of 71.1 as the spectre of high inflation returning weighed on consumers.
Composite PMI fell to 52.7 in January, but despite this fall, it indicates a solid monthly expansion in business activity.
The trade deficit widened in November to $98.4bn, above the forecast $96.6 bn deficit as US companies rushed to secure goods ahead of the Trump administration tariffs.
Donald Trump was inaugurated as the 47th President of the US in late January and it became evident that President Trump will use the threat of tariffs aggressively. While President Trump may yet alter or even withdraw these latest tariffs against Canada, China and Mexico, they will have immediate and far-reaching negative economic impacts if left unaltered.
Euro area
The ECB cut its key interest rates by 0.25% in its January meeting, reflecting an updated inflation outlook. The ECB remains data-driven and emphasises a cautious approach to ensuring inflation stabilises at the 2% target.
Annual inflation rose to 2.5% in January, above the market expectation of 2.4%, and driven by a sharp increase in energy costs.
Retail sales increased 0.2% in December, with annual sales increasing 1.9%, which was as anticipated. In December, consumer confidence rose 0.3 points to -14.2, broadly in line with expectations as consumers expectations about general economic conditions improved slightly.
The unemployment rate rose to 6.4% in December, in line with market forecasts.
The Composite PMI rose to 50.2 in January, marking the first expansion of activity since mid-2024. This expansion was driven by a second consecutive expansion in the services sector coupled with a slower contraction in manufacturing.
UK
The Bank of England cut rates by 0.25% to 4.50% in January and maintained its stance that monetary easing is expected to be gradual this year, as mounting growth concerns weigh against stubborn levels of underlying services inflation. The Bank also revised its growth forecasts for the current year downward as economic activity has already underperformed expectations from November, indicating a dovish shift in the risk balance between growth and higher prices in the near term.
Annual inflation unexpectedly edged lower to 2.5% in December, from 2.6% in November and below forecasts of 2.6%. The unemployment rate rose to 4.4% for the three months to November, above market expectations of a flat reading.
Consumer confidence dropped 5 points to -22 in January, signalling growing concerns over an economic slowdown and the impact of the government’s decision to raise taxes on businesses to fund investment and public services.
CompositePMIroseto50.6inJanuary, ahead of the forecast 50.0, and driven solely by services activity.
China
Annual inflation rose to 0.5% in December, above the market expectation of 0.4%, driven by season effects from Lunar New Year.
In China, the Caixin/S&P Global manufacturing PMI dropped to 50.1 for January, barely holding above the 50-point threshold which indicates an expansion of activity. Anecdotal reports suggest that most January improvements in demand relate to stockpiling, in anticipation of global trade disruptions from the incoming US government.
The Lunar New Year holiday has delayed the release of key economic data until next month.
Japan
The Bank of Japan raised its short-term interest rate by 0.25% to 0.5% in its January meeting. This is the highest rate in 17 years and in line with market consensus. The move reflected wage rise momentum and steady progress in inflation. This is the third rate hike since the central bank ended negative interest rates in March 2024, with the central bank also indicating plans for further rate increases and reduced monetary support if economic and price data align with its forecasts.
Annual inflation rate jumped to 3.6% in December as food prices continued to rise sharply. Core inflation rose to a 16-month high of 3.0%.
Retail sales fell 0.7% in December, reversing the 1.8% increase seen in November. The annual rate rose 3.7%, beating expectations of a 3.4% increase, and is the fastest growth since June 2024. Consumer confidence came in at 35.2 in January and fell short of the expected 36.6 figure.
Composite PMI increased to 51.1 in January, with services growing at the fastest pace in four months.
Currencies
The Australian dollar (AUD) predominantly maintained its value over the month of January, closing 0.2% lower in trade-weighted terms to 59.6, appreciating against the US Dollar (USD), Pound Sterling (GBP) and Euro (EUR) whilst depreciating against the Japanese Yen (JPY).
The Australian dollar strengthened against the USD in January, as the strength of the USD begins to cool down amid tariff discussions; largely involving Europe and China, Australia remained relatively unscathed. This contributed partly to the Australian dollar’s appreciation against the Pound Sterling for the month.
Relative to the AUD, the GBP depreciated the most in January, depreciating by 1.4%. Whilst the JPY was the best performer primarily due to the Bank of Japan’s rate hike. Year-on-year, the AUD remains behind the USD, EUR, GBP and JPY by 5.7%, 1.4%, 3.4% and 0.1% respectively, in relative terms.
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