Global Markets at a Crossroads: Key Updates & Insights

Big Picture

Since January 20, 2025, there have been significant economic and political developments, including President Trump's inauguration and subsequent actions, shifts in financial markets, and international events that have impacted global trade and stability.

Political and Economic Actions:

• President Trump's Inauguration and Executive Orders: Donald Trump was inaugurated as US President on January 20, and he has since signed multiple executive orders addressing energy, inflation, and immigration. These orders included halting $300 billion in clean energy loans, which impacts renewable energy and manufacturing projects. Trump also signalled possible tariff hikes on Canada and Mexico and suggested the possibility of universal tariffs on all goods. However, he postponed immediate tariff actions until February. Additionally, Trump ordered the recession of 78 Biden executive orders and actions, as well as a regulatory freeze.
• China's Economic Strategy:?China has been actively working to stimulate its economy. It has ordered mutual and pension funds to increase their investments in domestic stocks (A-shares). Starting this year, the government is requiring commercial insurance funds to put 30% of their annual new premium revenue into share markets, which is intended to boost the languishing markets and encourage spending. China's Vice Premier Ding Xuexiang stated that China is not seeking a trade surplus and is willing to import more high-quality products and services10.
• Gaza Ceasefire:?Israel and Hamas have reached a ceasefire agreement in Gaza12. Credit rating agencies indicate that this could improve Israel's credit rating by reducing risks to public finances and the potential for conflict escalation.

Global Economic Outlook and Concerns:

• Geopolitical Instability: The World Economic Forum's Global Risks Report 2025 indicates an increasingly fractured global landscape with escalating geopolitical tensions. The IMF's January 2025 update showed a significant turnaround for Argentina's economy after strong contractionary measures.
• Trade and Tariffs: There are concerns about the impact of potential U.S. tariffs on global trade. The World Economic Forum's Chief Economist's Outlook highlights concern about growth, inflation, and trade fragmentation, with emphasis on the impact of U.S. policies and a turbulent outlook for global trade.

Other Notable Developments:

• Technology and AI: The World Economic Forum in Davos focused on emerging technologies and their applications in various sectors, including artificial intelligence.
• Inflationary Pressures: Potential inflationary pressures are a concern due to protectionist policies.
• European Banks: European banks have seen a comeback, with high dividends and buybacks.
• Mining in Africa: Military regimes in Africa's Sahel region are cracking down on international mining companies, trying to gain more control of resources.
• UK Economy: In the UK, business growth has slightly improved, but there are also intensified price pressures and contracting employment.

Overall, the period since January 20, 2025, has been marked by significant policy changes from the newly inaugurated U.S. President, efforts by China to stimulate its economy, and various shifts in financial markets amidst a backdrop of global geopolitical and economic uncertainty These events have the potential to significantly impact the global economic landscape in the coming months.

Assets At a Glance

Equities:

• Overall Positive Trend: U.S. and European stock markets generally saw gains and reached new record highs. The S&P 500, Dow Jones, and Nasdaq all experienced increases, driven by strong corporate profits for the end of 2024 and tech sector performance. The Stoxx Europe 600 also hit a record high. However, U.S. stocks retreated from these record highs at the end of the week.
• Asian Market Gains: Asian shares also rose, with the Hang Seng index gaining 1.8% and Japan's Nikkei 225 increasing by 1.2%5.
• Chinese Market Stimulus: China has unveiled a strategic plan to encourage increased investment from state insurers and commercial insurance funds into its A-share market to revive its lagging stock market. The Chinese government is mandating mutual and pension funds to increase investments in local A-shares.
• Tech Sector Strength: The tech sector showed strong performance and contributed to the overall gains in equities.
• Valuation Concerns: U.S. equities have soared to their most expensive level relative to government bonds in a generation, causing some investor nervousness over high valuations. The equity risk premium has fallen into negative territory, reaching a level last seen during the dot-com boom and bust. There are concerns that current valuations may not be sustainable, especially if profit margins revert to historic norms.
• Market Concentration: There are concerns about market concentration, particularly the heavy reliance on the "Magnificent Seven" tech stocks.

Commodities:

• Oil Price Volatility: Oil prices initially increased but then declined, following President Trump's remarks about potentially asking Saudi Arabia and OPEC to lower prices. Citi increased its oil price outlook for 2025 due to geopolitical risks, but prices are expected to ease later in the year.
• Gold: Gold price surged last week and reached near to All-Time High (ATH) at $2770.92 per ounce.

Bonds:

• Treasury Sell-off: There has been a sell-off in Treasuries, which has driven 10-year bond yields up to 4.65%9. This increase in bond yields has contributed to a decline in the equity risk premium.
• Relative Valuation: Relative valuations between bonds and equities are very wide.

FX (Foreign Exchange):

• U.S. Dollar Decline: The U.S. dollar weakened due to uncertainty over immediate trade tariffs and the Bank of Japan's interest rate hike. The dollar slipped against the Japanese yen.

Cryptocurrencies:

• Bitcoin Surge and Retraction: Bitcoin surged to a record high of $109, ahead of President Trump's inauguration. While the price has retracted somewhat since then, it has remained relatively strong, trading above $105,000 by the end of the week.
• Trump's Cryptocurrency: President Trump launched his cryptocurrency, $TRUMP, which, along with Melania Trump's $MELANIA, has tumbled from earlier peaks.

Key Events Influencing Markets Next Week

The week of January 27 to 31, 2025, is set to significantly influence global financial markets through a series of key economic events and corporate earnings reports.

Economic Events:

• Federal Reserve Interest Rate Decision (Wednesday, January 29): The Federal Open Market Committee (FOMC) will announce its interest rate decision. While markets anticipate that rates will remain unchanged due to persistent inflation and a robust labor market, any unexpected moves or statements could lead to market volatility.
• U.S. Gross Domestic Product (GDP) Report (Thursday, January 30): The advance estimate for Q4 2024 GDP is scheduled for release. Economists project a growth rate of approximately 3%, a slight deceleration from the previous quarter's 3.1%. Deviations from this forecast may impact market sentiment.
• Personal Consumption Expenditures (PCE) Price Index (Friday, January 31): As the Federal Reserve's preferred inflation gauge, the PCE index for December will be closely monitored. The annual core PCE inflation rate stood at 2.4% in November; any significant changes could influence future monetary policy decisions.

Corporate Earnings Reports:

Several major corporations are set to release their earnings reports, which could have substantial effects on market dynamics:

• Monday, January 27: AT&T (T): The telecommunications giant will report its quarterly earnings. Investors will be attentive to subscriber growth and revenue figures.
• Tuesday, January 28: Boeing (BA): The aerospace leader's earnings will be scrutinized for updates on production rates and order backlogs. General Motors (GM): Investors will look for information on electric vehicle initiatives and overall vehicle sales.
• Wednesday, January 29: Tesla (TSLA): The electric vehicle manufacturer's earnings are anticipated, with a focus on delivery numbers and future guidance. Microsoft (MSFT): Key areas of interest include cloud services growth and developments in artificial intelligence investments. Meta Platforms (META): Investors will assess user engagement metrics and advertising revenue.
• Thursday, January 30: Apple (AAPL): The tech giant's earnings will be analyzed for iPhone sales performance and services revenue growth. Intel (INTC): As a leading semiconductor company, Intel's results will provide insights into the broader chip industry. Visa (V): Focus will be on transaction volumes and cross-border payment trends.
• Friday, January 31: ExxonMobil (XOM): The energy sector will look to ExxonMobil's earnings for indications of oil demand and production levels. Chevron (CVX): Similar to ExxonMobil, Chevron's results will shed light on the state of the energy market.

These events and reports are expected to play a pivotal role in shaping market movements during the week. Investors are advised to monitor them closely to make informed decisions.

Investment Idea

The SPDR S&P 500 ETF Trust (SPY) is a widely traded exchange-traded fund that tracks the performance of the S&P 500 index. As of January 24, 2025, SPY's closing price was $608.02, with a market capitalization of approximately $558 billion.

Performance and Returns:

SPY has demonstrated strong historical performance:

• 3-year average return: 9.25%
• 10-year average annual return: 12.84%
• Since inception average annual return: 10.43%

Key Characteristics:

• Expense ratio: 0.0945% (higher than some competitors like VOO at 0.03%)
• 12-month distribution yield: 1.23% (as of September 2024)
• Average daily trading volume: Approximately $22 billion

Sector Allocation:

As of September 2024, SPY's top sector allocations were:

1. Information Technology: 31.55%
2. Financials: 12.90%
3. Healthcare: 11.67%
4. Consumer Discretionary: 10.22%
5. Communication Services: 8.77%

Investment Analysis:

SPY is considered a suitable investment for those seeking moderate risk and exposure to the U.S. equity market through passive index investing.

Seasonal Patterns:

Analysis of SPY's historical performance reveals certain seasonal patterns:

• Strongest months: April, October, and November
• Weaker months: February and September
• Highest volatility: March and October

Technical Analysis:

As depicted in the price chart, SPY has stabilized above the 200-day Exponential Moving Average (EMA) on the 4th of August 2024 and has risen further above the 100-day EMA, indicating these levels are acting as dynamic support. Currently, SPY is trading in the all-time high (ATH) zone. If the price stabilizes above $610.00, it can be considered a buying signal for long-term investment. Investors are advised to set a stop-loss at $582 to limit downside risk to approximately 4.5%.

Risk Disclaimer

The information provided in this newsletter is for educational and informational purposes only and should not be considered financial advice. Financial markets involve substantial risk, and investments can fluctuate in value, leading to potential losses. Past performance is not indicative of future results. Before making any investment decisions, readers should consider their own risk tolerance, and financial situation, and consult with a licensed financial advisor if necessary. The strategies and opinions expressed are based on current market conditions and may change without notice.