Market Commentary 4th February 2025 – from Charlie Hancock

The UK government announced that they are preparing to implement a change to defined benefit pension scheme rules, in order to allow schemes greater flexibility to invest in UK infrastructure. The Treasury said that UK defined benefit schemes have a total surplus of £160bn which could be directed into UK investments.

The Bank of England (BoE) stated that mortgage approvals for new house purchases remained steady in December, with a slight increase from the amount approved in November. With the BoE expected to cut interest rates at their policy meeting in February, analysts expect to see lenders reduce mortgage rates over the coming weeks.

The European Central Bank (ECB) cut interest rates by 0.25% last week, taking their key interest rate down to 2.75%. This marked the fifth cut implemented by the ECB since mid-2024, with the central bank focussed on stimulating economic growth across the Eurozone. The ECB’s President, Christine Lagarde, stated that the decision to cut rates was unanimous and hinted that further cuts were likely in the coming months.

Data showed that the Eurozone economy flatlined during the final quarter of 2024. Germany and France negatively contributed to the bloc’s overall growth, with both economies shrinking during the fourth quarter. Spain was the outlier, with growth of 0.8%.

The release of an Artificial Intelligence (AI) chat bot in China, named DeepSeek, prompted nervousness amongst investors in the US. The AI project was reportedly funded with a relatively small amount of capital and built without the use of any Nvidia chips. The news prompted investors to re-assess the dominance of US tech companies, with the share price for Nvidia falling by 15.81% across the week.

President Trump’s second week in office saw a further escalation in trade tensions. Trump re-iterated his intention to implement 25% tariffs on Mexico and Canada, while threatening to increase existing tariffs on Chinese goods. Trump stated that “Mexico and Canada have never been good to us on trade” and added that the US “doesn’t need the products that they have”.

Economic data in China indicated that momentum stalled in January. A Purchasing Managers’ Index (PMI) showed that the manufacturing sector unexpectedly slipped into contraction during the month, while the services sector saw growth slow significantly. The Shanghai Stock Exchange was closed for part of the week due to Chinese New Year holiday celebrations, however, the DeepSeek AI chat bot release appeared to prompt improved sentiment on Chinese tech stocks. Alibaba saw their share price rise by 13% across the week, while Tencent rose by 6%.

The Bank of Japan (BoJ) hiked interest rates last week, taking their key policy rate to 0.50%. This marked the third hike within 12 months and the announcement appeared to prompt some weakness in Japanese equities. Inflation data for the Tokyo area showed that headline prices rose by 2.5% year-on-year in January, which added to expectations for the BoJ to hike rates again in the coming months.

Wobbles in the US equity market appeared to prompt investors to increase their exposure to government bonds last week, with yields declining as a result of the rise in demand.

The ECB’s decision to cut interest rates, whilst hinting at further rate cuts in the near future, contributed to government bond yields in the Eurozone declining last week. The ECB stated that policy is still “restrictive” and they are not yet at the “neutral rate”.

The Federal Reserve kept interest rates on hold following their policy meeting last week. The Fed chair, Jerome Powell, stated that the Fed does “not need to be in a hurry to adjust”, adding that the labour market remains solid and inflation is “somewhat elevated”.

GBP / EUR – Current 1.1960 Previous 1.1894

The Pound fell by 0.71% against the US Dollar last week, with the ‘safe haven’ Dollar strengthening amidst concerns about global trade wars. Against the Euro, the Pound gained 0.55%, with the ECB’s decision to cut interest rates and hint at further cuts contributing to weakness in the Eurozone currency.