Global equities hit the ground running in January, although there was a change of leadership, with Europe the standout performer instead of the US. Despite this, there were three bouts of volatility to digest, highlighting the caution that surrounds the positivity. Inflation jitters resurfaced at the start of the month, casting doubt on how many rate cuts the US Federal Reserve will deliver this year. Markets had been betting on a series of cuts, but persistent price pressures and solid economic data suggest the central bank may take a more cautious approach. Then came the most dramatic move of the month, with the release of Chinese company DeepSeek’s new AI model – which appeared to offer a similar product to US counterparts at a much lower cost – prompting a sharp (albeit temporary) sell off, led by the poster child NVIDIA.

Finally, the spectre of tariffs raised its head at the very end of the month. Emerging markets came under pressure amid these tensions, with the Trump administration announcing it would impose tariffs on imports from Canada, Mexico, and China, weighing on sentiment. Japanese equities were a notable laggard, with the Bank of Japan (BoJ) hiking rates by 25 basis points. Looking at the sector outcomes over the month, most were in the green, with communication services and health care leading the way, while tech brought up the rear.

Source: Bloomberg as at 31 January 2025.

After a subdued end to 2024, US equities came back strongly in January, led by the blue-chip Dow Jones Industrial Average, while the S&P 500 reached another all-time high. The technology sector, however, faced significant challenges. Nvidia saw a 17% one-day decline amid concerns over increased competition from Chinese AI firm DeepSeek, with the $600 billion hit to market value the biggest single-session loss in Wall Street history. The broader Nasdaq was also impacted as investors questioned the elevated tech valuations, however the aggressive sell-off only lasted for one day, and the tech benchmark closed January in the green and less than 3% beneath its all-time high.

At the end of the month, the Federal Reserve kept interest rates steady at 4.25%-4.5%, with Chair Jerome Powell signalling a cautious approach to future cuts, contingent on economic data. The US economy continued to show signs of strength, with 256,000 jobs added in December – well above expectations – and GDP growth of 2.3% for Q4, reinforcing the Fed’s cautious stance. President Trump’s rhetoric around deregulation and tax cuts further enhanced the positive sentiment around the economy. Meanwhile, the corporate earnings season got off to a strong start, although there were some notable outliers, with markets highly reactive to underwhelming releases.

The FTSE/JSE ALSI delivered a positive return in January, driven largely by a significantly stronger resources sector. Gold benefitted from heightened geopolitical uncertainty following the commencement of US President Donald Trump’s second term in office, pushing prices to new all-time highs. Additional support for commodities came from China’s latest round of economic stimulus, which boosted prices throughout the month and helped South Africa’s resources sector post an impressive 16.1% return.

The South African Reserve Bank (SARB) continued its rate-cutting cycle in January, lowering the repo rate to 7.50%. Although inflation remains below the midpoint of the SARB’s target range, the central bank remains cautious of external risks. Governor Lesetja Kganyago warned that renewed US protectionist policies could pose inflationary risks, potentially limiting further rate cuts, especially given growing concerns over their impact on South Africa’s export-driven industries.

On the economic front, growth forecasts for 2025 improved, driven by an expected rebound in agricultural production. Retail activity surged 7.7% year-over-year, supported by increased consumer spending, while manufacturing contracted 2.6% year-over-year amid slowing demand. Factory activity (PMI) declined for a second consecutive month in December, weighed down by trade disruptions in Mozambique, fuel shortages, and the looming closure of ArcelorMittal.

Source: Bloomberg as at 31 January 2025.

Chinese equities ended January roughly where they started, but that did not capture the extent of the market moves and swings in sentiment that unfolded during the month. Weak manufacturing data at the very start of the month, coupled with an increase in tariff and foreign policy rhetoric from US President Donald Trump in the lead up to his inauguration sparked a sell-off, as investors feared what lay ahead. The addition of Tencent and CATL to US Department of Defence’s blacklist created another layer of geopolitical complexity.

We witnessed a reversal of fortunes mid-way through the month as a series of supportive economic data points helped improve sentiment. Industrial production grew more than forecast in year-on-year in December, with signs that recent stimulus was starting to support China’s critical manufacturing sector. Export data was also stronger, while retail sales beat expectations as private spending rebounded. Market sentiment was also boosted by the announcement of the expanded trade-in program that should support demand for home appliances and consumer electronics in the coming months.

The surprise release of China’s low-cost AI model DeepSeek shocked the global tech world towards the end of the month. However, Chinese equities rallied following the release, as the perceived ‘technology gap’ between the two countries was re-assessed. While the implications of this development are still being digested, it was undoubtedly a wake-up call for the US and tech sector more broadly.

Finally, Chinese equities received another slight reprieve towards month-end as Trump started to verbalise a 10% tariff on Chinese imports from February, a lot lower than the figure suggested on this pre-election campaign trail. Expectations remain high that additional stimulus to improve private consumption is due to be announced, and there are hopes announcements will come at the upcoming Parliament meeting in March. The MSCI All China Index detracted -0.3% in January.

Emerging markets faced another turbulent month as investors navigated surging US treasury yields and a wave of risk-off trades following DeepSeek’s surprise AI model launch. Late in the month, trade tensions took centre stage as President Donald Trump threatened tariffs on Canada, Mexico, and China. While bond market pressures and AI-driven volatility eased toward month-end, the impact of new tariffs could shape market direction in February. Despite the uncertainty, the MSCI EM Index ended January with a +1.8% gain in U.S. dollar terms.

Chinese equities faced a challenging start to the year but stabilised later in the month. Early declines were driven by weak manufacturing data and renewed tariff concerns under President Trump. However, sentiment improved as economic data turned positive and tariff threats proved less severe than those promised during his campaign. Meanwhile, India’s stock market remained under pressure, weighed down by continued outflows, slowing economic growth, and concerns over stretched equity valuations.

Taiwan’s tech-heavy market gained momentum, driven by strong earnings from TSMC, while South Korea rebounded sharply as expanding manufacturing activity and rising export orders helped offset recent political uncertainty. Central and Eastern European equity markets started the year strong, mirroring broader EU gains, with Poland a standout performer. Latin American equities also rallied after months of underperformance, supported by rising commodity prices and easing inflation, which gave central banks more room to cut rates. This created a more favourable environment for equities across the region, with Brazil leading the gains.

European equities outperformed in January, recovering some of their relative weakness over the prior couple of months, with the benchmark Stoxx 600 reaching a record high. Against a backdrop of more stagnant economic data, the European Central Bank cut rates by 25 basis points over the month and intimated more may be on the way. Banks were particularly strong, with the sector delivering a double-digit return. With politics never far from the agenda, investors also turned their focus to potential tariffs coming from the US, and the snap election in Germany scheduled for 23 February.

The UK was also a record breaker, with the FTSE 100 setting a new high as the benchmark posted its best month for two years. There were a number of drivers, with the commodity-heavy nature of the market benefitting from a strong month for Brent crude after the US announced tougher restrictions on Russian oil and colder temperatures in the Northern Hemisphere boosted demand. Investors also looked to move away from tech stocks after new Chinese artificial intelligence chatbot DeepSeek suggested such technology can be delivered more cheaply than US counterparts, while the weaker pound provided a third tailwind to the UK, with about three-quarters of All-Share revenues coming from abroad.

January was a volatile month for fixed income markets, with bond yields generally rising across developed economies amid persistent inflation concerns, resilient economic data, and shifting central bank expectations. Markets also digested the early days of Donald Trump’s second presidency, with potential fiscal policy shifts influencing rate expectations. The Bank of Japan (BoJ) diverged from the broader trend, while European and US bond markets adjusted to evolving rate cut expectations.

US treasuries experienced significant fluctuations throughout January, with the 10-year yield ending the month at 4.54%, slightly lower than its mid-month highs. Stronger-than-expected economic data, particularly a robust labour market and higher inflation prints, led markets to reassess the likelihood of aggressive Federal Reserve (Fed) rate cuts in 2025. December nonfarm payrolls grew by 256 000, surpassing expectations, while core PCE inflation which focuses on a broad range of consumer expenses ticked up slightly to 2.8% year-over-year. Despite some Fed officials maintaining a cautious tone, market pricing for rate cuts moderated, with fewer than two full cuts expected for 2025.

European sovereign bond markets also saw yields rise, with the 10-year German bund yield ending January at 2.46%, as the European Central Bank (ECB) cut rates by 25 basis points to 2.75%. While the rate cut was widely anticipated, ECB President Lagarde maintained a cautious stance, emphasising the need for further data before committing to additional easing. Eurozone inflation remained above the 2% target, keeping expectations for deeper rate cuts in check. Meanwhile, the French bond market underperformed amid budget-related political turmoil, leading to a widening of the France-German yield spread. The euro weakened slightly against the US dollar, driven by diverging rate expectations between the Fed and the ECB.

The UK gilt market saw yields decline modestly by month-end, with the 10-year gilt yield closing at 4.54% after hitting multi-year highs earlier in the month. The Bank of England (BoE) held rates steady, and softening inflation data helped ease concerns about further tightening. However, fiscal concerns continued to weigh on UK markets, particularly as the government faced increasing pressure to manage spending and borrowing costs. Sterling remained under pressure against the US dollar, reflecting a cautious outlook on UK economic growth and monetary policy.

Japanese bond markets saw a rise in yields, with the 10-year JGB yield ending January at 1.25%. The BoJ held its policy steady, though speculation about a rate hike later in 2025 gained momentum following hawkish remarks from Governor Ueda. The yen strengthened against the dollar as expectations for BoJ tightening increased. Japan’s inflation data remained above target, but the BoJ signalled a cautious approach to exiting negative rates, contributing to ongoing market volatility.

Source: Bloomberg, as at 31 January 2025.

Volatility in government bond markets was a key feature of the month. Cautious rhetoric from some members of the US Federal Reserve’s (Fed) rate-setting committee, coupled with surprisingly strong economic and labour market data, prompted a sell-off in the US treasury market. The 10-year treasury yield peaked at 4.79%, before easing back on softer inflation data and more dovish rhetoric from the Fed, which persuaded markets that two rate cuts are still possible this year.

Against this backdrop of robust economic data, credit spreads continued to tighten across credit markets. This was more pronounced in the high-yield market than the investment-grade segment, which underperformed over the month. On a regional basis, US and European markets produced similar returns in the investment-grade space, while the US high-yield market outperformed Europe thanks to more pronounced spread compression in the former. Elsewhere in credit markets, assets such as bank capital and short-duration high-yield debt posted strong returns, benefitting from high levels of carry.

Fixed income markets began the year on a volatile note, reflecting oscillations in government bond markets. Cautious rhetoric from some members of the Federal Reserve’s rate-setting committee, coupled with surprisingly strong economic and labour market data, prompted a sell-off in the 10-year US treasury market. Subsequently, however, signs of improving inflation dynamics, more dovish rhetoric from the Fed, and a temporary sense of relief (Trump did not immediately impose tariffs after taking office) helped restore market confidence. As a result, expectations for two rate cuts this year remained intact, and treasury yields ended the month broadly unchanged.

It was a better month for EM currencies after the sell-off seen at the end of 2024, with the US dollar weakening after Trump’s initial hints at a softer stance on tariffs. Within emerging market economies, China reported stronger-than-expected growth, thanks to ongoing strength in exports, but activity levels in both the manufacturing and services sectors were weaker. In Latin America, divergent trends in inflation saw rates cut in Peru and hiked in Brazil. Capping a strong year for the country’s economy, Argentina reported a fiscal surplus for 2024. Elsewhere, Turkey’s current account data was better than expected and the central bank cut interest rates for the second time in this cycle, as expected. Meanwhile, encouraging inflation dynamics in South Africa increased the prospects of a rate cut there. Developments in Lebanon – namely, the appointment of both a prime minister and a president and hopes for an improvement in the geopolitical situation – were supportive for asset prices.

Against this backdrop, EM fixed income and currency markets posted gains. The local currency debt market (JP Morgan GBI-EM GD) gained 2.1%, driven by local currency strength. The hard currency sovereign debt index (JP Morgan EMBI GD) finished the month 1.4% higher, with strong performance among some high-yield markets again providing a boost. In the corporate debt market, the JP Morgan CEMBI BD gained 0.8%, with high-yield markets outperforming investment grade.

The emerging market corporate debt market posted a positive return in January, proving resilient when global government bond markets sold off early in the month. Credit spreads tightened on increased global investor confidence. Ukraine was the top-performing market in the index, followed by Israel – in both cases reflecting positive sentiment around geopolitical developments. It was a busy month for new issuance, and this was met with strong demand.

Source: Bloomberg as at 31 January 2025.

Many of the major commodity markets ended January in the black. Gold touched a record high of US$2,798 per Troy ounce late in the month, partly on strong buying fuelled by concern that threatened US tariffs on Canadian and Mexican imports could be applied to gold. The precious metal’s c.7% gain in January was supported more broadly by a weaker US dollar and safe-haven demand stemming from concerns that trade wars could weaken global growth. The shares of gold-producing companies outperformed the physical metal, with the NYSE Arca Gold Miners Index gaining about 15%. It was also a positive month for oil, with the price of a barrel of Brent crude ending January about 3% higher. The commodity gained after the US announced tougher restrictions on Russian oil, as low temperatures in parts of the Northern hemisphere supported demand. Among the major industrial metals, iron ore gained partly after some major producers reported lower-than-expected shipments due to weather disruptions, and on hopes that China’s stimulus plans may yet support demand this year. Among agricultural commodities, forecasts for US corn and soybean crops were revised lower during the month, supporting prices.