Monthly Market Commentary - March 2025

6 minute read

Macro outlook

What’s happened:

Stock markets experienced a mix of gains and losses in February, with the MSCI All Country World Index (MSCI ACWI) declining by -1.7%, bringing its year-to-date (YTD) performance to 2.8%.

What's ahead:

Financial markets will remain sensitive to geopolitical events, in particular, the ongoing Ukraine/Russia peace talks, the implementation of Trump’s tariffs, and upcoming economic data releases (more below). Upcoming central bank policy decisions from the Federal Reserve, Bank of England, and ECB will also be closely watched for signals on future interest rate adjustments.

Equities:

Eurozone equities were standout performers, with the MSCI Europe ex UK Index rising by 2.3%, bringing its YTD performance to 10.9%. In particular, encouraging company results and gains in defence stocks helped to overcome uncertainty about US trade policy.

UK equities also performed well, with the MSCI UK Index increasing by 2.2%, bringing its YTD performance to 8.3%. The latest UK inflation and wage data prompted financial markets to reduce bets on interest rate cuts by the Bank of England.

In contrast, North American equities faced challenges, with the MSCI North America Index decreasing by -2.6%.

Fixed income:

In February, fixed income markets exhibited varied performance. UK gilts delivered positive returns, with an overall gain of 0.9%, supported by gains across different durations, with longer-duration gilts (15 years and above) performing best. UK investment-grade corporate bonds also saw a modest increase of 0.5%.

In the United States, US Treasuries performed strongly, gaining 2.2% in February. This positive performance was driven by investor demand for safe-haven assets amid ongoing geopolitical uncertainties and economic data releases.

In the Eurozone, government bonds delivered positive returns, with Eurozone government bonds gaining 0.7%. This performance was supported by the European Central Bank’s (ECB) cautious approach to interest rate cuts and mixed inflation data from major Eurozone economies.

Trump’s tariffs and US equities

In February, President Donald Trump announced the implementation of 25% tariffs on imports from Mexico and Canada, and 10% tariffs on Chinese imports, effective February 1. These tariffs are part of a broader strategy to address national security concerns related to illegal immigration, the influx of synthetic opioids, and trade imbalances. However, Trump agreed to postpone the tariffs on Mexico and Canada for 30 days, providing temporary relief to the markets. Additionally, Trump announced 25% tariffs on all steel and aluminium imports – including from Canada and Mexico – effective March 12.

US equities faced significant challenges in February

US equities faced significant challenges in February. US large cap decreased by -1.3%, bringing its year- to-date (YTD) performance to 1.4%. Growth stocks significantly underperformed value shares, while large caps outperformed small caps. Tech-heavy stocks dropped by -3.9% (-2.3% YTD), marking its worst monthly performance since early September. In particular, the Magnificent Seven declined amid regulatory uncertainty and concerns about the sustainability of the AI-fuelled rally, including shares of NVIDIA which fell by -8.5% following its earnings report. Tariff fears continued to drag on equities as President Trump reiterated plans to impose new levies on several trade partners by March 4.

BoE rate decisions and UK equities

In February, the Bank of England’s Monetary Policy Committee (MPC) voted to reduce the Bank Rate by 0.25 percentage points to 4.5%. This decision was driven by significant progress in controlling inflation and wage growth. The MPC’s vote was 7–2 in favour of the rate cut, with two members advocating for a larger reduction to 4.25%. Additionally, the Bank of England halved its forecast for UK economic growth this year to 0.75% and projected that inflation would remain above target until 2027. Governor Andrew Bailey indicated that the BoE might consider further reductions in borrowing costs, depending on future economic conditions.

In the markets, UK equities had a mixed performance. Large cap increased by 2.0%, bringing its YTD performance to 8.3%, while mid cap fell by -2.9% (-1.1% YTD).

German election and Eurozone equities

The German election in February resulted in a victory for the conservative CDU/CSU bloc, led by Friedrich Merz, securing 28.5% of the vote. This marked a significant rebound for the CDU/CSU, which had faced challenges in previous elections. The right-leaning Alternative for Germany (AfD) achieved its best result in any German election, garnering 20.8% of the vote and moving into second place. This strong performance by the AfD reflects a growing rightward shift among a segment of the electorate, driven by concerns over immigration and national identity.

Following the election, the CDU/CSU bloc has begun exploratory talks with the SPD on forming a coalition government. The potential coalition is expected to bring stability and a more pro-investment orientation to Germany, which should positively influence market sentiment in the coming weeks. Investors are optimistic that the new government will focus on economic reforms, increased public investment, and policies that support business growth, thereby boosting confidence in the German market.

European equities were the standout performers in February, with encouraging company results and gains in defence stocks helped to overcome uncertainty about US trade policy. Major stock indexes were mixed, with Germany’s large cap rising by 3.8% (13.3% YTD) and France’s gaining 2.0% (10.0% YTD). Italy’s increased by 6.0% (13.5% YTD), while Switzerland’s added 3.2% (12.2% YTD).

Ukraine/Russia peace talks and alts

February saw significant geopolitical developments centred around the Ukraine/Russia peace talks and a high-profile meeting between Ukrainian President Volodymyr Zelenskyy and US President Donald Trump, along with other EU leaders. The meeting between President Trump and President Zelensky, which included discussions with EU leaders, was marked by tense exchanges and heightened geopolitical tensions. The outcome of these talks remains uncertain, with US officials expressing doubts about the path to a peace deal.

The reaction to the Trump-Zelenskyy meeting influenced defence stocks in Europe. The EU’s response to the meeting, which included commitments to increase defence spending, sent stocks from companies like Rheinmetall, BAE Systems, and Leonardo soaring, reflecting investor optimism about increased defence budgets.

The geopolitical uncertainty stemming from these discussions also had a notable impact on the oil markets. Crude
oil prices lost 2.8%, settling at $69.76 per barrel. The potential for a peace resolution raised the possibility of easing sanctions on Russian oil, which could increase global supply and weigh on prices. Additionally, ongoing trade tensions and tariff threats from President Trump added to the market’s cautious outlook.

In contrast, gold prices rose by 2.1% as investors sought safe-haven assets amid the geopolitical uncertainties. The increase in gold prices reflects broader market concerns about the stability of global economic conditions and the potential for further disruptions stemming from the Ukraine/Russia conflict and other geopolitical tensions.

Author

Richard Carter

Head of Fixed Interest Research