Global economic growth remains steady at approximately 3.3%, driven by robust consumer spending supported by rising incomes in developed economies. While U.S. tariffs may prompt China to introduce further fiscal stimulus, declining interest rates and inflation create a supportive environment for global markets. The outlook for 2025 appears favorable under these conditions. Nonetheless, geopolitical risks remain elevated, with potential for an escalation in the Russia-Ukraine conflict.
In the U.S.: Resilient growth at 2.5%
U.S. economic growth moderated in Q4 2024, with annualized GDP expanding at 2.5%, down from 3.1% in Q3. Consumer spending, particularly on durable goods, drove growth, potentially fueled by stockpiling ahead of expected tariff-driven price hikes. While government spending supported expansion, flat net exports and declines in business investment and inventories contributed negatively to overall growth.
In Europe: Central bank cuts rates amid weak growth
Eurozone growth remains sluggish at under 1%, prompting the European Central Bank (ECB) to cut rates by 25bps in January, aligning with market expectations. The ECB noted disinflation is progressing well but emphasized rates remain restrictive, with external risks like U.S. tariffs posing threats to activity. Markets anticipate ~100bps of additional rate cuts by year end, with the deposit rate expected to decline from 2.75% to 2.00% or 1.75%.
In China: Resilient growth amid tariff risks
China’s 2024 GDP growth reached 5.0%, driven by resilient exports (5.9%) but constrained by mild consumption (3.5%) and weak investment (3.2%). Amid threats of new U.S. tariffs, we expect tariffs to rise to at least 30% on average in 2025, potentially reducing GDP growth by 0.6ppt, although the 2025 growth target is likely to remain around 5%. Monetary policy is shifting to “moderately loose,” with anticipated reserve requirement ratio (RRR) cuts of 50-100bps, People’s Bank of China (PBoC) rate cuts of 20-40bps, increased fiscal spending, and continued support for real estate and stock markets.
In January, investors significantly broadened their AI and Tech investments across regions, with the Hang Seng Tech Index surging 5.1%, outperforming the Nasdaq’s 2.2% gain. This shift reflects a notable rotation in global equity markets, as U.S. stocks experienced their largest valuation-driven reallocation in a decade. The Euro Stoxx 50 rose 8.0%, outpacing the S&P 500’s 2.7% increase.
Equity: The Euro Stoxx 50 led gains with an 8.0% MTD increase, while the S&P 500 and Nasdaq 100 rose 2.7% and 2.2%, respectively. Asian markets showed mixed performance, with the Hang Seng Tech Index up 5.1%, but the Nikkei 225 and NIFTY 50 down 0.8% and 0.6%, respectively. The S&P 500 VIX Index fell 0.9ppt to 16.4, reflecting reduced market volatility.
Fixed Income: In January, U.S. Treasury yields saw a slight decline, with the 2-year and 10-year yields dropping by 4bps to 4.22% and 4.54%, respectively. German yields rose modestly, with the 2-year and 10-year yields up 4bps and 9bps to 2.12% and 2.46%, respectively. Chinese yields were mixed, as the 2-year yield rose 17bps to 1.27%, while the 10-year yield fell 5bps to 1.65%.
Currencies: The U.S. dollar strengthened against major European currencies, with GBPUSD down 1.1%, EURUSD down 0.2%, and USDCHF up 0.6%, while weakening against major Asian currencies, with USDJPY down 1.6% and USDRMB down 0.3%.
Commodities: In January, gold and copper saw significant gains, rising 7.0% and 6.9% to USD 2,813/oz and USD 9,396/mt, respectively. WTI oil also increased modestly, up 1.1% to USD 72.53/bbl.
Bitcoin: The cryptocurrency saw strong performance in January 2025, reaching a value of 105,050 (+12.1% MTD).
The U.S. Federal Reserve has adopted a cautious stance amid tariff uncertainty and rising inflation, heightening equity price volatility. Artificial intelligence (AI) is recognized as a major investment opportunity, led by technology giants’ Capex. Broader capital flows into AI are expected across industries, regions, and government bodies. AI adoption will spur investments in electricity, hardware, software, and the broader Tech ecosystem.
In the U.S.: The largest rotation in the past 10 years from U.S. stocks to European stocks led to U.S. underperformance. Investors significantly broadened their AI and Tech investments across regions, bringing down the performance of the U.S. market in favor of Europe and China Tech stocks. Yet, the S&P 500 has rebounded near all-time highs, supported by strong U.S. bank earnings and positive economic data despite concerns over inflation and monetary policy. While tariff threats may cause short-term volatility, a robust U.S. economy, healthy corporate earnings, and advancements in AI investments are expected to sustain the rally.
In Europe: Euro Stoxx 50 (+8.0%) outperformed S&P 500 (+2.7%) in January. However, European growth faces headwinds from trade tariffs and weak labor markets, with the recovery contingent on stronger consumer demand. After bottoming in 2024, Eurozone earnings are expected to recover modestly by 5% in 2025. Despite structural challenges, European stocks offer exposure to key growth themes, such as energy, resources, and longevity, driving earnings growth.
In China: Hang Seng Tech (+5.1%) outperformed Nasdaq (+2.2%) in January. Nonetheless, China seeks clarity on Trump’s tariff policies before introducing further stimulus. Chinese digital transformation stocks may present an investment opportunity, given their attractive valuations and strong growth potential. In this context, a strong government stimulus would underpin a substantial Chinese market rally.
The USD has surged to historical highs in 2025, driven by robust U.S. economic data and Fed policy stability, while European growth remains weak. The Fed kept rates unchanged at its first 2025 meeting, offering no guidance on future easing. These dynamics supported continued USD strength in January 2025. We anticipate a reversal of USD strength in 2025 as Fed rate cuts reduce the greenback’s elevated valuation. Starting from Q2 2025, the USD could decline due to lower Fed funds rates, slower growth, and increasing budget deficits, while Trump is advocating for a more competitive dollar, particularly against RMB and JPY.
Due to heightened currency volatility and uncertainty amid Trump’s new tariffs on China and Europe, we recommend hedging (protecting) EUR and RMB exposures.
EURUSD at 1.0250: broke through 1.05 and going towards parity
Europe’s sub-1% growth, combined with low and declining interest rates, as well as additional tariffs, contribute to the EURUSD fall towards parity. The ECB is expected to continue cutting rates by 25 to 50 basis points per quarter throughout 2025. The war in Ukraine is adding a geopolitical “risk premium” to the euro
USDRMB at 7.32: close to the all-time high amid Trump’s additional 10% tariffs
The USDRMB pair might rise temporarily due to potential new U.S. tariffs on Chinese imports, although the PBoC should stabilize it through a controlled fixing range. Eventually, from Q2, the pair is likely to revert and decline on strong China growth, large trade balance surplus (USD 100bn/month), and Trump’s will for a more competitive dollar.
USDJPY at 155: rebounding towards the all-time high of 162 on increasing U.S.-Japan yield differential
As the Bank of Japan (BoJ) is sticking to a close-to-zero rate policy and U.S. bond yields increased close to their 20-year highs, investors’ carry trades (i.e. borrowing in JPY and investing in USD assets) continue, pushing USDJPY close to its all-time high. However, we expect the USDJPY pair to weaken from Q2 2025, when the U.S. Fed resumes rate cuts and Trump puts pressure on Japan to normalize the JPY valuation to a stronger level (i.e. lower USDJPY).
Given ongoing U.S. economic resilience and the uncertainty associated with tariffs, migration, tax, and regulatory policies from the new administration, the market has repriced the Fed’s end point at a higher level. This has resulted in yields rising across the curve, in addition to some term premia widening. Yet, central banks, including the Fed, are expected to keep on cutting rates until the end of 2025.
How to benefit from the cycle of central bank rate cuts?
Bond yields remain elevated as overall bond credit spreads (i.e. the extra yield above government yields) are wider, reflecting some political unrest and uncertainty both in the U.S. and Europe. Central bank support and robust economic growth are maintaining low default rates. This environment presents an opportune moment to increase active bond exposures.
High interest rates can be locked for longer periods by investing cash in bonds from large Investment Grade banks, which can provide an income per annum close to 6% in USD and 4% in EUR, with a duration of 5 to 10 years.
Gold: All-time high at USD 2,818/oz, up 7% in January
We expect a continued gold rally in 2025, driven by lower interest rates, ongoing geopolitical risks, and concerns over U.S. government debt, which are fueling central bank and investor demand for gold. The uncertainty surrounding Trump’s fiscal, trade, and geopolitical policies will further bolster gold demand. Central banks acquired nearly 1,000 metric tons in 2024, with expectations for similar or higher purchases in 2025.
Oil: Prices surge near USD 75/bbl, up 1.1% in January
Crude oil prices have surged to their highest level since last August, driven by increased heating oil demand amid cold weather in the U.S. and Europe and record U.S. oil demand in October. Lower Russian crude exports, concerns over Iranian oil supply, and falling global inventories have further tightened the market. OPEC+ compliance with production quotas has also supported price stability.
