Weekly Market Update 21 January 2025

Last week was a good week for investors, with most major markets posting positive numbers.

This included the FTSE 100, which grew 3.1%, as it reached record highs.

A number of factors supported this rise, including a slight fall in December’s UK inflation numbers. Although a drop from 2.6% to 2.5% may not sound like a big change, the headline figure hid a larger fall in services inflation. Services inflation – which includes hotels and travel – proved persistent for most of last year. However, in December, inflation in the sector fell from 4.9% to 4.4%, beating expectations. It should be noted this figure included a sizable drop in airfare prices, which are notoriously fickle, so some of this drop might be temporary.

In addition, UK GDP figures for November released last week showed 0.1% growth. After a strong start to 2024, the UK economy struggled for growth as the year progressed. In fact, at the end of November, UK GDP was smaller than it was in May.

Commenting on these numbers, Hetal Mehta, SJP’s Head of Economic Research, said: “The November 2024 GDP data are the first positive growth print since August, but only just. The UK economy has grown by a mere 1.8% over the past three years; after the initial post-pandemic recovery the trend has been much flatter relative to the 2014-2019 period. Consumers are cautious, as evidenced by the upward trend in the savings ratio and weaker business sentiment. Overall, this paints a picture of stagflation.”

Subsequently, the Bank of England (BoE) is expected to gradually reduce interest rates this year, including a potential cut next month. However, Hetal notes: “The monetary policy response is not straightforward as it is the supply-side policies that are needed to help the economy out of this situation. In the short term, there is enough progress on inflation to allow the BoE to keep cutting interest rates gradually.”

On the supply-side, Rachel Reeves is expected to face some difficult decisions, with limited options to try and generate growth in the coming months. In March, she’ll deliver her Spring Statement, which is likely to show that most, if not all, of the fiscal headroom she gave herself in the last Budget is now gone.

UK equity performance was further helped by a weaker pound relative to the US dollar. The majority of earnings for companies in the FTSE come from abroad, and so a weaker pound means these companies will record high sterling revenues and profits. A cheaper pound also makes domestic share prices more attractive for overseas investors, another factor for the market optimism last week.

The positive momentum was seen in a number of markets. In the EU, the European Central Bank (ECB) also appears to be on course to gradual interest rate cuts, barring any economic shock, which helped lift the MSCI Europe ex. UK up 3.1%.

Moving to Asia, Chinese equities concluded the week in positive territory, the Shanghai Composite rising by 2.3% (local currency) on the back of better-than-expected GDP data.

In the US, the S&P 500 climbed 2.9%, on the back of encouraging inflation figures and some strong corporate results. The US faces some uncertainty at the moment, with Donald Trump’s inauguration. Republican voters will be hoping he hits the ground running, and Trump has revealed plans to make extensive use of executive orders to quickly push through a raft of changes in areas including immigrations and environmental regulation.