February 2025 Market Update: Introduction
TL;DR: February brought significant shifts in global markets, from the RBA’s first rate cut in years to fluctuations in Australian and international equities. While some regions struggled, others showed resilience. Read on for key insights.
Summary
US tariff concerns continue to weigh on global investor sentiment. Softer US economic data and stable inflation have strengthened expectations for US rate cuts in 2025. In Australia, a solid earnings season and the first cash rate reduction since 2020 did little to lift the share market. Economic indicators suggested a more supportive outlook for the Australian economy.
Selected Market Returns (%), February 2025
Sources: FTSE EPRA/NAREIT DEVELOPED, *FTSE Global Core Infrastructure 50/50 Index
Key Market and Economic Developments in February 2025
Financial Markets
Global share markets mostly retreated from all-time highs in February with the MSCI World Index (USD) dipping 0.7%. Weakness was driven by US large cap companies while the Australian share market also faltered despite a marginally better-than-expected reporting season. The Trump administration's trade and tariff rhetoric increased market volatility, while softer economic data lifted bond markets.
Australian Equities
The S&P/ASX All Ordinaries dropped 4%, erasing most year-to-date gains despite a reasonable earnings season. The selloff was broad-based, with the S&P/ASX MidCap 50 and Small Ordinaries falling 4.7% and 2.8% respectively. Defensive sectors provided some support with utilities and communication services rising 3.2% and 2.6%. The information technology sector led declines, falling a substantial 12.3% after being the best-performing sector over the previous 12 months. Healthcare followed falling 7.7%, and financials lost 4.4% as banking shares produced lacklustre results.
Global Equities
US equities surged in a late recovery but still closed the month lower. The S&P 500 (USD) fell 1.3% but the losses were more pronounced in the tech-heavy Nasdaq (USD) which dropped 4%. Despite a solid earnings season, investors’ enthusiasm for Artificial Intelligence (AI) shares waned. The Russell 2000 Index (USD) underperformed significantly, falling by 5.3% as US small caps pared their post US election gains.
While US shares reacted negatively to downbeat economic data, European equities responded positively to economic data and a potential end to the Ukraine war. The Euro 100 Index (EUR) gained 2.8% and the German DAX (EUR) rallied 3.8% taking the index to double digit gains for the year-to-date. The Hang Seng (HKD) jumped by 13.4% as investors poured capital into Chinese technology companies. Positive investor sentiment was driven by stronger earnings and a rare meeting between Chinese President Xi Jinping with tech executives which was seen as a strong show of public support for the sector.
Commodities
Gold continued to rise, closing 1.5% higher at US$2,851/oz, supported by trade tensions and market uncertainty. The copper price rose by 7.2% ahead of potential US tariffs. Iron ore remained rangebound dipping 1.4%, while crude oil slipped 3% to $72.80 per barrel.
Bond Markets
Despite rising concerns about the inflationary impacts of tariffs, global bond markets produced solid gains. US bonds rallied as yields fell in line with softer US economic data. The US benchmark 10-year yield ended at 4.20%, 35 basis points lower. Australian bonds also gained as the Reserve Bank of Australia (RBA) cut the cash rate, joining global peers in the monetary easing cycle. The Australian benchmark 10-year yield closed the month 14 basis points lower at 4.34%.
Economic developments
The RBA Delivers a Hawkish Rate Cut
The RBA reduced the cash rate by 25 basis points to 4.1%, as expected. The tone of the board’s communications was more hawkish than anticipated, with Governor Bullock cautioning that market pricing of a further three rate cuts is too optimistic.
The monthly Consumer Price Index (CPI) reading for January came in at 2.5%, below the forecast of 2.6%. The data provided favourable news as the trends in some of the larger components of the CPI basket continued to moderate with rental growth slowing and dwelling construction costs falling marginally.
The strength of the labour market has continued to surprise positively. Employment rose by 44,000 in January, doubling expectations, and a strong outcome following a rise of 60,000 recorded in December 2024. The domestic economic picture remains steady with signs of improvement as the Westpac-Melbourne Institute Leading Economic Index reached two-and-a-half-year highs and consumer expectations about the economy tended more optimistic.
Weakening Economic Confidence as Trade Uncertainty Intensifies
Preliminary US Q4 GDP remained steady at 2.3%, supported by strong consumption trends. The January jobs report reflected healthy labour conditions. Despite payrolls rising by less than expected at 143 000, the previous month’s number was revised higher. The unemployment rate ticked down 0.1% to 4.0% when no change was expected.
Measures of US consumer confidence and sentiment contracted with weakening assessments of current conditions and expectations. This was further illustrated by the January NFIB Small Business Optimism Index which retreated as high expectations moderated in the wake of rising uncertainty related to the Trump administration's economic policies.
The US Services Purchasing Manager Index (PMI) showed an unexpected contraction of the services sector. The reading of 49.7 came in below both the key 50 level and the 53 forecast with policy uncertainty being the major negative factor. PCE inflation matched expectations as headline inflation rose by 2.5%, near the US Federal Reserve’s (Fed) projection for 2025. In response, market pricing for future rate cuts became more optimistic with at least two 25 basis point cuts anticipated for 2025.
Meanwhile, other developed markets such as the Eurozone and Japan have started to post positive economic surprises. Japanese GDP growth of 2.8% year-on-year, far exceeded the 1% expectation. The latest European sentiment data has also shown improved positive momentum.
Outlook
An unpredictable global backdrop is restraining expectations for the global economy. US economic growth remains stable but weakening consumer trends point to a more challenging environment ahead. However, other developed markets, including Australia, are showing signs of improving economic growth, supported by moderating inflation and easing monetary policy. Risks are prevalent though, with the potential for a reacceleration of inflation under an aggressive trade war scenario.
The current investment climate is complex, where pro-growth policies compete with policies that undermine investor confidence. It requires an adaptive and measured approach to portfolio positioning; particularly as new opportunities arise.
Major Market Indicators
Sources: Quilla, Refinitiv Datastream
The February 2025 Market Update highlights a dynamic investment landscape, shaped by shifting economic conditions, trade uncertainties, and inflationary trends. Australia’s rate cut signals a new phase of monetary easing, while global markets present challenges and opportunities. As we move forward, keeping a close watch on central bank policies, corporate earnings, and international economic developments will be crucial in adapting investment strategies. While volatility persists, periods of change often bring new prospects for growth and portfolio diversification.
Are you concerned about how market changes might impact your personal financial situation? Contact our team to discuss your investment strategy and ensure you're on track.
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