Welcome to the Questa March Market Commentary 2025. February saw record-breaking highs in UK and European stock markets, defying expectations as President Trump’s trade tariffs shook global markets. While European equities outperformed the US, questions remain about how long this trend can last.

With interest rate cuts, inflation concerns, and geopolitical tensions shaping the financial landscape, let’s take a closer look at the key market movements.

UK: FTSE 100 Breaks Records Despite Inflation Concerns

For the second month in a row, the FTSE 100 hit an all-time high, closing at 8,809.74 on 28th February 2025. Strong corporate earnings and investor confidence helped drive the index upwards, with defence stocks performing particularly well due to renewed European efforts to promote peace in Ukraine.

However, the economic backdrop remains uncertain.

• The Bank of England cut interest rates from 4.75% to 4.50% on 6th February, hoping to support growth.
• The pound fell 0.8% to $1.241 in response, reflecting concerns over stagflation (a mix of stagnant growth and rising inflation).
• UK inflation unexpectedly rose to 3% in January 2025, up from 2.5% in December 2024 – the fastest increase in ten months.

Despite the stock market surge, the combination of rising inflation and lower interest rates creates uncertainty for investors and consumers alike.

Europe: Outperforming the US in 2025 So Far

European stock markets started 2025 strongly, outpacing the S&P 500 in a way not seen since 2000. The STOXX Europe 600 index reached a record high, with Germany’s DAX up 2.4% and France’s CAC 40 also seeing significant gains.

Several factors contributed to this unexpected strength:

• Valuation Appeal – European stocks traded at 14x forward earnings, compared to 22x for US stocks, making them attractive to value investors.
• Geopolitical Optimism – Hopes for a Ukraine peace plan boosted confidence, with investors eyeing potential economic benefits fromreconstruction and resumed gas flows.
• Stronger Economic Indicators – Improved Purchasing Manager Index (PMI) readings and increased merger and acquisition activity suggested a more resilient European economy.
• Defence Stocks Surge – With European governments ramping up security spending, defence stocks saw significant gains.

How long Europe can sustain this momentum remains to be seen, but for now, it has benefited from a shift in global investor sentiment.

United States: Trade Tariffs Fuel Volatility

The US market had a turbulent February, with major indices struggling:

• S&P 500 down 1.4%
• Dow Jones down 1.6%, including a 700-point drop on 21st February
• Nasdaq down 4%, as big tech stocks took a hit

Investor confidence wobbled following Trump’s new tariffs on Canada, Mexico, and China, which sparked fears of a trade war. While some reports suggest this has fuelled national pride in affected countries, leading to a shift towards domestic products, the long-term economic impact remains uncertain.

US economic indicators also weakened:

• Consumer sentiment fell
• Existing home sales were lower than expected
• The services sector contracted for the first time in over two years

Meanwhile, US Treasury yields dropped, with the 10-year yield hitting 4.28%, its lowest level since December. This suggests investors are nervous about economic growth prospects.

Far East: China and Japan Move in Opposite Directions

China’s markets had a mixed performance:

• The Shanghai Composite Index fell 0.92%, weighed down by trade concerns.
• The Hang Seng Tech Index surged 25% from January lows, fuelled by AI developments such as DeepSeek and renewed interest in Chinese tech stocks.
• The yuan weakened by 2.2% against the dollar, prompting tighter capital controls from Chinese authorities.

Japan’s economy, on the other hand, showed resilience:

• The yen strengthened, reaching 149.285 per US dollar.
• Core inflation hit a 19-month high, prompting the Bank of Japan to maintain a hawkish stance on interest rates.
• GDP growth expectations remain positive, with rising wages supporting economic stability.

Emerging Markets: Feeling the Pressure

The impact of US tariffs was particularly pronounced in emerging markets:

• India’s Nifty 50 fell 14% from its 2024 peak, marking the worst consecutive monthly drop in nearly 30 years. High inflation and foreign investor withdrawals weighed heavily.
• Saudi Arabia’s stock index fell 1.6%, led by a 2.2% drop in Saudi Aramco’s shares after a disappointing annual profit report.
• Abu Dhabi’s index rose 0.3%, helped by gains in firms like Borouge.
• Brazil’s central bank remained cautious, as credit growth continued despite high borrowing costs.

Final Thoughts: A Volatile Year Ahead?

So far in 2025, US policy decisions have created market uncertainty, but ironically, Europe has emerged as a surprising winner. Whether this trend continues depends on how trade tensions evolve and whether peace efforts in Ukraine and the Middle East gain traction.

This is why maintaining a well-diversified global portfolio remains crucial. Market trends can shift quickly, and as President Trump shapes his second term, plenty more surprises are likely in store.