February 2025 was an eventful month for financial markets, characterized by periods of strength and turbulence. The month began on a cautious note as markets reacted to escalating trade tensions, particularly the threat of new US tariffs on Canada, Mexico, and China. However, a temporary extension for Canada and Mexico provided relief, fueling a short-lived rally that pushed the S&P 500 to an all-time high on February 19. As the month progressed, sentiment shifted towards risk aversion, with renewed tariff concerns and weaker US economic data weighing on equities, particularly technology stocks. Despite these headwinds, European equities remained resilient, supported by strong corporate earnings and fiscal stimulus. Meanwhile, the move toward safe-haven assets boosted sovereign bonds and gold, offering investors a buffer against market volatility.
Equities
US equity markets experienced a turbulent February, with the S&P 500 peaking at an all-time high, only to reverse sharply as renewed tariff threats and weaker economic data dampened investor sentiment. Technology stocks bore the brunt of the selloff, with the Magnificent 7 declining 8.7%, their worst monthly performance since December 2022. This weighed heavily on the broader index, which ended the month down 1.3%. However, consumer staples and real estate stocks provided some stability, benefiting from a defensive rotation amid rising uncertainty. The Federal Reserve’s commitment to maintaining its rate stance kept investors cautious, particularly as inflation concerns resurfaced. Additionally, consumer confidence fell to an eight-month low, signaling potential headwinds for discretionary spending and broader economic growth.
On the other hand, European equities outperformed US markets, supported by expectations of higher public investment. The MSCI Europe ex-UK Index gained 3.4%, with Spain’s IBEX 35 surging 7.9%. Germany’s DAX climbed 3.8% in February, driven by government announcements of EUR 500bn in fiscal stimulus focused on defense and infrastructure. With consumer demand holding steady and governments pledging increased spending, European equities remain relatively well-positioned.
China’s markets soared in February, with the Shanghai Composite rising 11.7% as investors cheered policy support for technology and manufacturing sectors. The government’s backing of AI giant DeepSeek provided a boost to tech-related equities, while signs of credit growth further strengthened investor confidence. However, tariff pressures from the US and lingering property market concerns remain risks for China’s broader economic stability.
Fixed Income
Fixed income markets saw strong demand for sovereign bonds as investors shifted towards safe-haven assets in response to equity market volatility and economic uncertainty. The US 10-year Treasury yield dropped 33 basis points to 4.21%, marking its largest monthly decline since mid-2024, as investors priced higher recession risks and potential Fed rate cuts later in the year.
However, in Europe, the bond market took a different turn. Germany’s announcement of its substantial fiscal support led to a selloff in government bonds, pushing yields higher as investors reassessed the implications of elevated public spending and debt issuance. The 10-year Bund yield climbed sharply, reflecting concerns over rising deficits and the potential for increased borrowing costs in the future. This move also pressured peripheral European bonds, as expectations of higher government spending across the region led to a reassessment of sovereign risk.
Corporate credit markets remained relatively stable, with investment-grade spreads tightening slightly as investors sought safety in quality debt. However, the high-yield segment underperformed, reflecting concerns over economic softness and the impact of tariffs on corporate earnings.
Emerging market debt saw renewed inflows, benefiting from a weaker US dollar and improving sentiment in Chinese financial markets. This led to a 1.6% gain in emerging market bond indices, though risks remain from trade uncertainty and geopolitical instability.
Commodities and Currencies
Oil markets faced a sharp reversal in February, with Brent crude sliding 4.7% to USD 73.18 per barrel and WTI dropping 3.8% to USD 69.76. Early supply concerns tied to geopolitical tensions were offset by President Trump’s national energy emergency, which fueled expectations of higher US production.
The US dollar weakened modestly, with the USD Index down 0.7% as shifting Federal Reserve expectations and lower Treasury yields prompted a slight retreat. Meanwhile, gold benefited from the risk-off sentiment, continuing its upward trend as investors sought safe-haven assets. Bitcoin saw a rather sharp pullback, falling 17.5% to USD 84’212, as risk appetite waned across financial markets.
Looking Ahead
Markets are entering a more challenging phase, with heightened volatility and increasing headwinds for risk assets. While recent rallies in equities have been supported by fiscal stimulus hopes and resilient corporate earnings, growing concerns around higher interest rates, global trade disruptions, and geopolitical risks could weigh on sentiment. Investors are starting to shift towards defensive holdings, with gold, sovereign bonds, and quality dividend-paying equities seeing stronger demand.
Additionally, the macroeconomic backdrop remains uncertain, as central banks tread carefully between controlling inflation and supporting growth. With volatility structurally moving higher, we anticipate a more cautious stance across asset classes in the months ahead. Guided by our Global Macro Roadmap and the potential risks of stagflation impacting the US economy, we are adopting a selective approach to markets. We are focusing on more resilient sectors and incorporating downside protection to safeguard against potential market turbulence.
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