Domestic and overseas equities ended stronger for the month. The inauguration of the US president, concerns around US tariffs and worries around US leadership in AI did not seriously impact equity market sentiment. The US corporate earnings season supported equities, with growth continuing in the low double digits.
USA
US equities were positive, with strong earnings and positive sentiment (the S&P 500 returned 2.8% for the month). The NASDAQ was weaker than broader markets. Concerns increased that US AI may be impacted by the Chinese company, Deepseek’s lower cost AI model. Nvidia was particularly impacted.
The US Federal Reserve held rates at current levels at its January meeting, referring to strength in the economy and jobs markets. It also expressed a desire for greater clarity on proposed presidential policies, including the content of the policies and their impacts.
Europe
The MSCI Europe Index (in EUR) was particularly strong (6.4% in January). This strong performance may have been partly linked to moving from US technology stocks toward European equities.
Business activity indicators are still shrinking, following from previous ongoing weakness. The European Central Bank is part way through an interest rate easing cycle with more cuts expected by the market over 2025.
Asia
China, Japan, Taiwan and Korea all delivered positive returns. Shortly after the end of the month, the US announced a 10% tariff on all Chinese imports. The impact of tariffs is important for the outlook of Chinese manufacturing and business activity.
Australia
Australian equities outperformed Developed Market equities, returning 4.5% for January. All sectors were positive, except for Utilities. The Consumer Discretionary sector was strongest (6.8%).
CPI published in January indicated inflation is returning to target. Expectations are generally high that interest rate cuts will come at the Reserve Bank of Australia’s February meeting. Before the publication of the CPI, the RBA had noted that they have increasing confidence that inflation is moving sustainably towards target levels.
Currency and bonds
Australian bonds (0.2%) and overseas bonds (0.4%) were both stronger. Changes to Australian and US 10-year bond yields were small over the month. The Australian 10-year government bond yield rose 6bps to 4.43%. The US 10-year yield was virtually flat, falling 2bps to 4.55%.
Performance of major currencies relative to the US Dollar was mixed. The AUD received some reprieve (up 0.7%), following a period of weakness in late 2024. Ongoing strength in the US economy relative to Europe and Australia is a likely cause, along with a widening rate differential over the latter half of 2024. The AUD was otherwise stronger relative to the Euro and Pound Sterling, but weaker relative to the Japanese Yen.