MARKET PULSE: MID JANUARY 2025

TRUMP’S EXPECTED ECONOMIC POLICIES TAKE CENTRE STAGE IN MARKETS


EQUITY MARKETS

At the tail end of the reporting period, US stocks and bonds surged as data revealed a sharper-than-expected easing in core inflation, reducing to 3.2% in December from 3.3% in November, while headline inflation aligned with forecasts at 2.9%. The report fuelled optimism for swifter Federal Reserve interest rate cuts, with markets now anticipating the first cut by July instead of September. This came after a hot jobs report in the US which showed that the economy created 256,000 jobs in December which sent yields up and rate sensitive equities up. Equity markets were broadly positive with the Budapest Stock Exchange registering the best returns for the first two weeks with a return of 5.80% which is mostly explained by the country’s close ties with the incoming U.S administration. Similarly, the FTSE MIB also performed strongly with a return of 4.27% as Italy is also expected to benefit from a Trump administration. Indeed, Italy has been debating the closeness of the Meloni government to Musk as the Italian government is in advanced negotiations with Musk’s SpaceX for a deal to provide encrypted telecommunications services via the Starlink satellite internet provider. Overall, the first two weeks of 2025 saw European equities outperforming US equities with the Euro Stoxx 50 returning 2.90% in comparison with the S&P 500 returning 1.21%. The worst performing equity markets were the Nikkei 225 (-3.63%), Shanghai Shenzhen CSI 300 (-3.45%) and Taiwan Stock Exchange (-2.20%).

Chinese officials are exploring Elon Musk’s potential role as a broker to prevent TikTok’s U.S. ban or facilitate a sale of its U.S. operations, as the divest-or-ban law comes into effect soon. While discussions are in early stages, Musk’s strong ties with both Chinese officials and the U.S. administration position him as a key figure in resolving the issue, amidst ongoing legal battles and political manoeuvring. JD Sports warned of a challenging retail market with profits expected below prior forecasts, leading to a 9.4% drop in its shares, as it faces headwinds like inflation and heavy discounting by competitors. In contrast, Ocado Retail reported strong sales growth of 17.5% in its fourth quarter, boosted by an increase in active customers and a record-breaking Christmas, driving a 10% rise in Ocado Group’s shares. BlackRock achieved record net inflows of $641 billion in 2024, bringing its assets under management to $11.55 trillion and driving a 14% increase in annual revenue to over $20 billion for the first time. The company’s growth was bolstered by strategic acquisitions in private markets, rising market performance, and higher fees, though it faced leadership changes with the departure of a key executive. Bank of America reported strong fourth-quarter profits of $6.7 billion, driven by 4% loan growth, robust trading revenue, and a 44% rise in investment banking fees. It outperformed rivals in lending growth and achieved a 110% increase in net profits compared to the same period in 2023. Eli Lilly's shares dropped 7% after sales of its weight-loss drugs Mounjaro and Zepbound missed analyst expectations, contributing to a full-year revenue shortfall of $500 million. Despite the setback, the company remains optimistic about 2025, projecting $58-61 billion in sales and planning expanded manufacturing capacity and new market launches.


SECTOR PERFORMANCE

The past two weeks saw a notable divergence in sector performance across the S&P 500. Energy led the gains with robust growth (7.65%), while materials (3.48%) and industrials (2.73%) sectors also delivered strong returns. Financials (2.45%) and healthcare (2.20%) showed moderate increases, followed by smaller upticks in communication services and consumer discretionary sectors. Utilities posted marginal positive returns compared to other sectors with a return of 1.45%, while the information technology sector declined slightly by 0.50%. Real estate and consumer staples sectors underperformed, experiencing declines, with consumer staples facing the largest drop of 2.34%.

In Europe, the European energy sector demonstrated the strongest performance as in the United States with a return of 6.26%, followed closely by information technology (5.59%) and financials (4.41%), which also posted significant gains. Moderate increases were seen in the healthcare (2.34%) and industrials (2.31%) sectors, while communication services and utilities experienced more modest growth with returns of 1.72% and 0.96% respectively. Materials showed minimal positive movement, while consumer discretionary remained relatively flat. On the downside, real estate and consumer staples sectors underperformed, with consumer staples experiencing the largest decline, reflecting weaker sentiment in defensive areas with a negative return of 2.71%. Overall, the results highlight strength in cyclical and growth-oriented sectors, with defensive and real estate sectors lagging. Trends in sectoral performance have been similar in both Europe and the United States.


CENTRAL BANKING AND GEO-POLITICS

On 8 January 2025, the minutes by the Federal Open Market Committee (FOMC) were published which showed the committee remains focused on economic strength whilst stabilising inflation. The federal funds rate was cut by 0.25% in combination with balance sheet reductions. The analysis by the committee showed that economic growth remains robust as domestic demand and easing labour market conditions support the economy as inflation moderated but remained elevated. The movement by financial markets showed optimism as equity performance remained stable and treasury yields tipped higher. Trump’s re-election has put the committee into a wait and see mode due to trade, immigration policies, and inflation risks, thereby emphasising the need for cautious monetary adjustments. Internationally, growth slowed in advanced and emerging economies, with inflation generally easing. The FOMC reaffirmed its commitment to maximum employment and achieving a 2% inflation target. The period under review has been characterised by two key factors for the US economy. In the first part, jobs data came in strongly which sent yields higher, whilst in the latter part of the period under review, both headline and core inflation came lower than expected, which pushed yields lower and risky assets higher. Market odds of a rate cut by the Federal Reserve remains low with current expectations centred in the July meeting. Nonetheless, this is expected to materially change as economic factors evolve. On the UK front, recent softness in economic data which saw inflation slowing down to 2.5% meant that the odds of a 25-bps rate cut stands at 90% for the next February Bank of England meeting. Finally, the European Central Bank is odds on to undertake a rate cut of 25 bps at the end of January.

Undoubtedly for the first two weeks of January, the main news came from the ceasefire deal between Hamas and Israel. This deal means that the war in Gaza will be halted with the release of Israeli hostages and Palestinian prisoners. This came with the help of both the United States and Qatar as mediators. Whilst the details remain unofficial, it is expected that there will be a three-stage process. Biden has explained that the first stage would be to have a full and complete ceasefire, the second stage will bring a permanent end to the war and the final stage would be to reconstruct Gaza. This has brought a sense of optimism as war risks remain a key factor in underlying market risks. Canada has warned of imposing retaliatory tariffs on key U.S. products, such as steel and orange juice, if the incoming U.S. administration follows through on plans for a 25% tariff on Canadian imports. Jonathan Wilkinson, Canada’s energy and natural resources minister, emphasized the need for North American cooperation, particularly against China’s dominance in critical minerals. While labelling tariff disputes are a distraction from larger issues like China's control over rare earths, Wilkinson highlighted opportunities for deeper Canada-U.S. collaboration in defence and critical mineral development to reduce reliance on Chinese supply chains.


COMMODITIES

Plans to expand U.S. liquefied natural gas (LNG) exports could generate $1.3 trillion in economic gains, with export capacity expected to double in five years under policy shifts favouring new infrastructure and reduced regulatory barriers. While the industry stands to benefit significantly from eased restrictions, analysts caution that litigation and environmental concerns may slow progress. Despite record exports and investor enthusiasm, concerns over rising domestic fuel costs and climate impacts could spark legal challenges. Cleveland-Cliffs and Nucor are preparing a joint bid to acquire US Steel, with plans for Cleveland-Cliffs to purchase the company and sell its Big River Steel unit to Nucor. This move follows President Biden’s controversial blocking of Nippon Steel’s prior $15 billion takeover bid on national security grounds, which has sparked political and legal tensions. Schlumberger, a major U.S. oilfield services company, faces growing pressure to cease operations in Russia following new sanctions by the Biden administration targeting petroleum services in the country. Amid bipartisan calls for stricter enforcement, concerns have risen about the company's potential legal risks and its role in supporting Russia's energy sector, as other Western competitors have exited the market.


CURRENCIES

The U.S. dollar has been broadly positive during the first two weeks of 2025 as investors continue to favour U.S. assets to generate returns. There is an element of a crowding effect on the U.S. dollar, despite the economic backdrop continuing to support the currency compared to global peers. In the current global economic state, the risks of a broad global recovery, which would be negative for the U.S. dollar, remain unlikely given the lack of economic policy intervention from various key global economic players, further bolstering the U.S. dollar. The incoming U.S. administration, led by Trump, is expected to propel the U.S. economy forward, although balancing economic stimulus with the overall inflation picture will be a delicate matter. Despite the strength of the U.S. dollar, the British pound has performed well, strengthening by more than 2% against the U.S. dollar. Unsurprisingly, the higher-yield environment worked against the Japanese yen during this period, as it weakened against most major global currencies.


OVERALL

In conclusion, the first two weeks of 2025 have seen equity markets perform broadly positively with European equities outperforming their U.S. counterparts and notable sectoral gains in energy and technology. The global economic landscape continues to favour the U.S. dollar amid robust domestic demand and restrained global recovery prospects. Significant geopolitical events, such as the ceasefire deal in Gaza and Canada-U.S. trade tensions, remain critical for shaping future market trends.

Disclaimer: This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Aria Capital Management (Europe) or any of its related companies to participate in any of the transactions mentioned herein. This material may contain links to third-party websites or content. These links are provided for your convenience only and do not constitute endorsement or approval by ARIA Capital Management (Europe) and is not responsible for the content of linked third-party websites and does not endorse or guarantee the information, opinions, products, or services offered on these websites. Please review the terms of use and privacy policy of any third-party website you visit. The products managed by ARIA Capital Management (Europe) are typically available via professional advisers rather than individual investors, who should not rely on this information, but contact their financial adviser. This information is not intended to be complete or exhaustive and no representations or warranties, either express or implied, are made regarding the accuracy or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. Please refer to the relevant Prospectus and other relevant documents and/or the terms and conditions for any services offered for detailed information. Past performance does not guarantee future results. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. Investors should seek financial advice before making any investment decisions. The products and services here may not be available to residents of all jurisdictions. The investments underlying the company and its sub-funds do not take into account the EU criteria for environmentally sustainable economic activities.

ARIA Capital Management (Europe) Limited is authorised and regulated by the Malta Financial Services Authority, with Firm Reference number FEXS. A Limited Company registered in Malta No: C 26673. ARIA Private Clients is a trading name of ARIA Capital Management (Europe) Limited. Padraig O'Riordan and Paul Dee act as tied agents of ARIA Capital Management (Europe) Limited in Ireland.

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