Overview
February was a month to forget for US market participants. Whilst President Trump’s first term was a positive one for markets, like many sequels, Trump 2.0 has been disappointing thus far. The S&P 500 finished the month down 1.3% and the tech-focused Nasdaq was down close to 3% as AI enthusiasm faded.
Markets have also started Trump’s second term in a much more volatile fashion, exemplified by the near 20% spike in the Volatility Index (VIX) in February. This is largely a product of the uncertainty and concerns over the ever-changing news coming from the White House and, of particular concern, is that this uncertainty appears to be translating into weaker economic data. Consumer confidence dipped to a four year low and services activity, which has been propping up the US economy, came in much weaker than anticipated. Walmart, which provides a good indicator of consumer health, also supported this trend by displaying some weakness in results.
The upshot of this weaker data is that the market is now pricing in another rate cut from the Federal Reserve (Fed) with the US 10-year Government Bond falling over 0.3%. Whilst gilts had previously been tracking treasuries quite closely, they traded relatively flat over the month and sterling consequently avoided the weakness seen in the dollar. Meanwhile, the yen strengthened on back of the dollar’s weakness and another uptick in Japan’s inflation.
Elsewhere in equity markets, performance was also influenced by Trump’s rhetoric. The increasingly protectionist stance alongside the yen strengthening culminated in a 6.1% fall for Japan’s Nikkei 225, with export-oriented companies facing a growing currency and tariff headwind. India also had another tough month, with similar concerns and slowing growth, leaving the NIFTY 50 index at the lowest level since last June. China was the standout performer, with the Hang Seng index up 13.4% helped by tech enthusiasm and the first pick-up in inflation since August. The potential for an end to the Ukraine-Russia conflict and the announcement of increased defense spending also provided a positive tone for the UK and Europe.
Oil naturally fell close to 5% amidst the prospect of a peace deal in Europe, whilst gold continued to track higher.
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Our weightings are based on sterling as a base currency.
United Kingdom (UK)
Boosted by financial and defence stocks, the FTSE 100 continued its renaissance in 2025 adding a further 1.99% in February to end at a record high closing level for the index. Keir Starmer’s visit to meet Donald Trump at the White House was viewed positively with both hinting at a trade deal in the short term and the potential for the UK to avoid tariffs. Despite an interest rate cut, the more domestic FTSE 250 continued to struggle shedding a further 2.85% in February.
At their February meeting, the Bank of England’s Monetary Policy Committee voted by 7-2 to reduce rates by 0.25%. Interestingly, two members actually voted for a 0.5% cut in order to combat perceived economic slowdown. Andrew Bailey hinted at further rate cuts to come owing to sufficient progress being made on inflation but ‘how hard and how fast’ would be determined meeting to meeting.
Headline inflation increased 3% year-on-year in January, coming in modestly higher than the 2.8% forecast and up from 2.5% in December. Energy prices, VAT on school fees being implemented and airfares not falling as much as expected contributed to the rise. There was better news at a core and service level with both coming in roughly in-line with domestic price pressures assessed for the path of rate cuts.
There was better news on the UK economy in February, coming from a series of economic indicators. Firstly, growth in services and construction helped boost figures, which were expected to show a modest contraction. Retail sales grew well above forecast, aided by a strong performance from food, and house prices grew 3.9% year-on-year with mortgage approvals remaining at healthy levels.
United States (US)
February marked a weak month for US equities with all the major indices declining. Uncertainty around the direction and implementation of Trump’s tariff policies, weaker economic data, AI valuation concerns and mixed inflation readings combined to dent sentiment towards US equities. At the same time, cautious guidance from Walmart, coinciding with below forecast retail sales data showed a more hesitant consumer amidst the macro concerns.
There were mixed inflation numbers throughout the month as US Consumer Price Index (CPI) increased 3% in January on a yearly basis, missing forecasts that it would hold steady at 2.9%. Meanwhile, core CPI rose to 3.3% above consensus. However, the Fed’s preferred inflation measure, Personal Consumption Expenditure (PCE) showed prices rising as expected and inflation around 2.6%.
With consumer spending accounting for two-thirds of economic activity, there were a number of concerning readings in February. Consumer confidence plummeted in February, seeing its biggest monthly decline in more than four years over fears of trade, tariffs and inflation. Data for January’s retail sales also showed a 0.9% decline, far below the 0.1% decline expected and at odds with personal incomes that actually climbed through the month.
Further economic data released in February showed US Purchasing Manager’s Index (PMI), which tracks private sector activity, dropping to a 17-month low, a cooling housing market and softer non-farm payrolls in January. To further conclude a bad month, chip darling Nvidia smashed forecasts but saw its shares decline 8.5% as momentum among the Magnificent 7 begins to wane.
Europe
Europe performed strongly as hopes of an end to the Ukraine-Russia conflict and robust earnings reports buoyed sentiment. Peripheral regions including Spain and Italy continued to be the standout performers with the Spanish IBEX 35 up close to 8%, leading the broader European STOXX 50 which was up a little over 3%. Meanwhile Germany’s DAX was up close to 4% as some of the political uncertainty was removed by the end of month election. The conservative party claimed victory, with their leader Friedrich Merz set to become the next chancellor. However, the rise of the far-right continued as the Alternative for Germany (AfD) registered record gains to take second spot. The new coalition could work to remove the debt brake budget rule that would allow for greater investment spending and reignite growth in Europe’s largest economy. Moreover, an end to the Ukraine-Russia war would see an estimated $486bn of Ukrainian funds mobilised to rebuild the country and its European neighbours would no doubt benefit from the resulting boost to construction activity.
It was a solid month for economic data in the region, with a considerable bounce in economic sentiment and Composite PMI remaining in expansion. Core inflation picked up slightly from 2.6% to 2.7%, but the European Central Bank (ECB) looks set to proceed with another rate cut in March.
Emerging Market and Asia
Emerging Market assets posted a modest positive return in February, despite escalating tariffs and geopolitical uncertainties. This was largely driven by a strong rally in Chinese stocks, with the offshore Hang Seng jumping more than 10%, while Japan and India both saw declines exceeding 5%.
The Chinese stock market was lifted by surprisingly strong technology earnings and positive sentiment following a meeting between President Xi and leading tech entrepreneurs. However, the rally lost momentum after the US imposed an additional 10% tariff on China, following the original 10% tariff that took effect in early February. Despite the rally, Chinese stocks remain broadly undervalued, trading at less than 11x earnings, with domestic-oriented stocks yet to price in any significant recovery due to a lack of fiscal stimulus. A potential catalyst is China’s upcoming Two Sessions of the National People’s Congress and the Chinese People’s Political Consultative Conference, where Beijing will unveil its economic priorities, including a GDP growth target of around 5% and an increase in the fiscal deficit to 4% of GDP.
Japan’s stock market struggled amid a strengthening yen and rising Japanese government bond yields. Domestic chip and AI-related stocks led the decline, amid a broader sell-off in US tech stocks. Japanese government bond yields rose to their highest level since 2009 before retreating after a soft Tokyo-area core CPI print in February. While Japan’s economy grew by 2.8% in Q4 of 2024, surpassing expectations, concerns remain over the impact of US tariff escalation on Japan’s economy and the Bank of Japan’s path towards monetary policy normalisation.
India’s stock market continued to slide, driven by corrections in small and mid-cap stocks and foreign investors reallocating to China. However, optimism about India’s economic outlook remains supported by strong domestic growth. The government’s ramp-up in capital expenditure within its fiscal deficit target has helped support GDP growth, accelerating to 6.2% in the last quarter.
Fixed Income
US 10-year Government Bond yields dropped 0.32%, led by softening economic data and weakening consumer confidence, while inflationary pressures remain elevated, with PCE rising in line with expectations. Futures now price in two Fed rate cuts for 2025. However, uncertainties around tariffs, rising inflation expectations, and the troubling outlook for the US budget deficit suggest that the mini-growth scare may be overdone, with risks skewed to rising treasury yields.
In the UK, the 10-year Government Bond yields dropped only 0.05%, closing 0.25% above US Treasuries. While the Bank of England delivered the expected 0.25% rate cut, concerns over stagflation have grown due to higher inflation and wage data. A further 6% rise in the energy cap in April, along with the likely pass-through of the National Insurance increases, will likely push inflation higher until later this year. These factors, alongside downgraded growth forecasts from the Office of Budget Responsibility, have led to a significant reduction in market expectations for three rate cuts this year.
In the Eurozone, inflation data remained largely in line with expectations, reinforcing the ongoing disinflationary trend. German 10-year Government bund yields closed the month 0.05% lower. However, mounting calls for higher defense spending driven by an aggressive push from the US toward a Ukraine peace deal could raise government debt levels, limiting the ECB’s ability to lower rates further. As a result, bund yields are unlikely to rally significantly unless a more pronounced economic downturn emerges.
Alternatives
February saw gold and silver prices pull back from recent highs as the dollar continued to hold up in the wake of traders capitalising on the latest price rally. Towards the end of the month, gold fell below $2,905 as a stronger US dollar and rising Treasury yields weighed on the metal’s appeal as a non-yielding asset. With gold recently hitting all-time highs and still up 40% in the past year (in USD), it is unsurprising that there is selling pressure along with a reported drop in demand for gold in India and China (two key importers of gold). Notably, Trump and Elon Musk have stated that they wish to visit Fort Knox to personally audit the gold reserves held there and to revalue the 8,133 tonnes of gold that have not been valued since 1973, which could be used to renegotiate US debt or be sold to potentially repay debt; assuming it is still there! This audit and potential revaluation, whilst unconfirmed, could have a profound impact on the gold market and at the least allow gold to continue to propagate headlines.
Oil reported its biggest monthly loss since September 2024 as Trump’s tariff threats strengthen the dollar, reduce appetite for risk and muddy the outlook for energy demand. Trump confirmed the levies on imports from Canada and Mexico, the biggest suppliers of foreign oil to the US, which would take place in early March. Furthermore, the US President threatened to double an existing tariff on imports from China to which Beijing has vowed countermeasures. These tariffs will have a nuanced and complex effect on crude oil prices, as the reliance on imports from Mexico and Canada to fuel its refineries could raise oil costs. At the same time, higher charges on other goods pose a risk to economic growth, consumer confidence and thus energy consumption.
Property
The Halifax House Price index increased 3% year on year in January, the slowest pace since July but beating forecasts of 2.7%. The average property price climbed to a record high evidencing a decent recovery from December’s slight dip. The Residential Market Survey corroborated this lacklustre increase albeit noting that overall house prices are trending upwards across the UK with the North West of England experiencing the most robust growth.
The Nationwide House Price index rose 3.9% in February on a yearly basis, which was well above forecasts, with Nationwide’s chief economist noting that the second half of 2024 saw a notable pick up in total housing transactions. Looking ahead, changes to stamp duty commencing at the start of April are likely to generate volatility in transactions in the near term as buyers bring forward their purchases to avoid additional tax likely leading to a jump in transactions in March followed by softer months to follow. Whilst affordability remains a challenge, strong mortgage demand remains in place as January saw the largest increase in mortgage borrowing since 2022. The Bank of England’s recent rate cut, steady household earnings growth and persistent supply shortages should support modest house price growth this year.
The Construction PMI fell sharply from 53.3 to 48.11 in January well below market expectation and signifying a move to contraction in overall industry output and ending a 10-month streak of sustained expansion. Delayed client decision making on major products coupled with economic uncertainty and housebuilding downturn were all key reasons for this. The poor news continued with civil engineering activity, commercial inflows and purchasing activity all declining whilst input prices rose quickly and business confidence reached its lowest level since 2023.
1Figures below 50 indicates a contraction in activity whereas figures above 50 indicates expansion.
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Important Information
All Index data figures are sourced by Morningstar and correct as at 28 February 2025, unless otherwise stated.
The value of investments or any income arising from them may fluctuate and are not guaranteed. Past performance is not necessarily a guide to future performance.