Markets embraced the first full week of President Trump's new term with a wave of optimism, as trade policy uncertainty gave way to measured pragmatism and some intriguing AI-driven announcements. Equities surged globally, while energy markets and consumer sentiment presented a more mixed story. Let’s dive in.
U.S. Markets: Optimism Boosts Equities and Tech
Major U.S. stock indexes rallied, driven by confidence in trade policy moderation and tech sector exuberance. The S&P 500 hit a new record high on Thursday before pulling back slightly, while the Dow Jones and Nasdaq joined the uptrend. Growth stocks outperformed value shares for the first time this year, reflecting renewed enthusiasm for sectors like technology.
Key drivers:
Tariffs: President Trump’s decision to delay imposing new tariffs reassured markets. While tariffs on Canada and Mexico were floated for February, his comments on China hinted at a willingness to negotiate.
AI Investment: The announcement of "Stargate," a $500 billion joint venture between SoftBank, OpenAI, Oracle, and MGX, supercharged AI-related equities.
Manufacturing Rebound: January’s S&P Global data showed manufacturing activity rebounding after six months of contraction, bolstering economic optimism.
Housing Market: Existing home sales rose 2.2% in December, but 2024 marked the weakest year for home sales since 1995 due to elevated mortgage rates.
Consumer Sentiment: The University of Michigan’s Index of Consumer Sentiment dipped to 71.1 in January, weighed by concerns over inflation and unemployment.
Europe: Cautious Optimism Amid Rate Cut Signals
European equities gained ground, buoyed by hopes of further ECB rate cuts and the absence of immediate U.S. tariffs. France’s CAC 40 rose 2.83%, and Germany’s DAX climbed 2.35%, while Italy’s FTSE MIB lagged with a 0.18% decline.
Key themes:
UK Wages: Wage growth surged to 6.0% (ex-bonuses) in November, the fastest pace in six months. However, unemployment unexpectedly ticked up to 4.4%, reflecting a weakening labor market.
Business Activity: Eurozone business activity edged back into growth territory in January, with the composite PMI rising to 50.2. Services expanded, but manufacturing remained in contraction.
ECB Outlook: The European Central Bank (ECB) signaled further rate cuts, with policymakers hinting at easing moves in January and March.
Japan: Policy Normalization Powers Equities
Japanese equities soared, with the Nikkei 225 climbing 3.85% on optimism surrounding Trump’s trade policy and the Bank of Japan’s (BoJ) hawkish pivot.
Key themes:
Interest Rates: The BoJ raised its policy rate by 0.25% to 0.50%, the highest level since 2008. Inflation expectations were revised upward, and policymakers hinted at further hikes in 2025.
Inflation: Core inflation rose 3.0% year-over-year in December, keeping pressure on the BoJ to tighten further.
Currency Impact: The yen strengthened modestly against the dollar, supported by comments from Japan’s finance minister and the BoJ’s hawkish tone.
China: Trade Optimism Buoys Sentiment
Chinese equities posted modest gains as investors interpreted Trump’s softer stance on tariffs as a sign of potential negotiation. The Shanghai Composite rose 0.33%, while Hong Kong’s Hang Seng Index gained 2.46%.
Key themes:
Employment: The youth unemployment rate fell for the fourth consecutive month, signaling gradual labor market improvement.
Monetary Policy: The People’s Bank of China left key loan rates unchanged, though analysts expect further easing in 2025 to support growth.
What to Watch This Week
United States
Interest Rates: The Fed is widely expected to keep rates unchanged, but Chair Powell’s comments on inflation and future rate paths will be closely watched.
GDP Growth: Initial estimates project 3.0% annualized growth, highlighting resilience in the U.S. economy.
Eurozone & UK
Housing Market: January data on home prices will indicate whether the housing sector continues to weaken under rising mortgage rates.
Manufacturing Health: Updated January figures will reflect the sector’s response to higher energy costs and softening global demand.
ECB Outlook: Investors anticipate a rate cut, with ECB President Christine Lagarde’s comments likely to provide further clarity.
Japan
Inflation Data: Tokyo’s January core inflation report will be closely monitored as a leading indicator of national price trends.
Economic Performance: December's industrial output and retail sales will provide insight into Japan’s end-of-year momentum, particularly in trade-sensitive sectors.
China
Economic Activity: Official manufacturing and services PMIs will be released Friday, offering insights into China’s economic momentum as Beijing ramps up stimulus.
Conclusion
Markets entered the first full week of the new U.S. administration with strong momentum, driven by optimism around trade policy, AI investments, and central bank moves. As investors look ahead to key economic releases and monetary policy signals, market sentiment remains cautiously optimistic. Stay tuned for more insights in next week’s Market Roundup.
FAQs
Why did U.S. markets rally last week?
Markets responded positively to delayed tariff announcements, a major AI investment, and improving economic data.Why is Europe optimistic about rate cuts?
Softer inflation data and ECB signals have fueled expectations of further rate reductions in early 2025.What is driving Japan’s market rally?
The Bank of Japan’s hawkish shift and expectations of further interest rate hikes supported equities, while a strengthening yen added complexity.How is China’s economy performing?
Modest equity gains reflected optimism around U.S.-China trade, while steady monetary policy kept markets stable.What key economic reports should investors watch this week?
GDP growth in the U.S., ECB rate decisions, Japan’s inflation data, and China’s PMI figures will be closely monitored.
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