There was rising uncertainty around the potential impact of tariffs, Trump’s deregulation agenda, fiscal policy and immigration. Markets were concerned with uncertainty about trade policy. Developed Market equities were lower. The MSCI World (hedged into AUD) returned -0.9% over February.
USA
The S&P 500 returned -1.3% in the month. Some US economic data was weaker. That was on top of trade policy uncertainty. The US Federal Reserve kept rates steady. Their meeting minutes showed that they want “further progress on inflation” before they consider any further rate cuts. The US corporate earnings season has proceeded positively. Earnings growth continued to track in the low double digits.
Europe
European equities outperformed the US market. The MSCI Europe Index (in Euros) returned 3.5%. Relative performance over the trailing 3 months has been strong, and returns have been broad based across major European geographies. Defence stocks were a key driver for European performance. This was due to the expectations that European governments will begin investing more in defence spending.
Asia
Chinese equities returned 11.6% in local currency. Optimism was lifted by further stimulus measures announced by the Chinese government. These measures included easier monetary policy and supports for the property sector. There was higher optimism around local advancements in AI, and some indicators from the Chinese government that it intends to be more ‘business friendly’.
Australia
In Australia, equity markets were lower. The ASX300 returned -3.8%. The IT sector was hard hit. It returned -12.3%. The 2 largest sectors, that is, Financials and Materials, were lower, by –4.4% and -2.9% respectively. CPI numbers in January suggested inflation was gradually returning to target. This led the RBA to cut interest rates at its February meeting. The RBA said that they will continue with a cautious stance on the potential for further rate cuts.
Currency and bonds
Australian and Overseas bonds were both stronger. Australian bonds returned 0.9%, and overseas bonds returned 1.2%. It’s likely that markets were responding to the marginal rise in uncertainty surrounding the economic outlook. The Australian 10-year government bond yield fell 13bps to 4.30%. The US 10 year yield also fell, by 35bps to 4.19%.
The Australian dollar was weaker against the currencies of most major trading partners. Movements were most pronounced relative to the Japanese Yen (-3%), whilst performance relative to the US Dollar was more muted (-0.3%).