JANUARY 2025

EQUITY MARKETS

The month of January 2025 witnessed notable movements across various financial markets, influenced by a mix of political and non-political events. In the domestic equity markets, U.S. equities experienced a positive month, with the S&P 500 index rising by 2.8%. This growth was largely driven by optimism surrounding President Donald Trump’s proposed policy initiatives, including tax cuts and deregulation. For instance, the announcement of a significant reduction in corporate tax rates boosted investor confidence, leading to a surge in stock prices. However, uncertainty regarding the scope of tariffs and their potential economic implications tempered some of this enthusiasm. The technology sector, in particular, saw mixed reactions as investors weighed the benefits of deregulation against the risks of increased tariffs on imported components.

FIXED INCOME MARKETS

In the fixed-income markets, performance was mixed. U.S. Treasury yields rose slightly, reflecting investor concerns about inflation and the Federal Reserve’s monetary policy stance. The Fed left interest rates unchanged at 4.25%-4.50%, citing robust economic growth and somewhat elevated inflation. This decision came despite President Trump’s public pressure on the Fed to lower rates, highlighting the central bank’s commitment to maintaining its independence. In contrast, the European Central Bank (ECB) and the Bank of Canada (BOC) lowered their policy rates to support economic growth. The ECB’s decision was influenced by weaker-than-expected economic data from the eurozone, while the BOC aimed to counteract the economic impact of a severe winter storm that disrupted business activities in several provinces.

INTERNATIONAL MARKETS

Global equities also performed well in January, with the MSCI World Index gaining 3.3%. The transition of power in the U.S. and changes in foreign policy and trade dynamics influenced international markets. Notably, Japan’s central bank raised interest rates for the third time since March 2024, responding to rising inflationary pressures. Meanwhile, China’s economy expanded by 5%, meeting government targets, driven by strong domestic consumption and increased infrastructure spending. The release of two competitive large language models (LLMs) by Chinese start-up DeepSeek also sparked investor interest in the technology sector, despite concerns about the long-term monetization structure of these foundational LLMs.

KEY FOCUS

Interest rates remained a focal point in January 2025. The Federal Reserve’s decision to hold rates steady was influenced by solid economic activity and a healthy labor market. However, markets are pricing in the possibility of two rate cuts later in the year if inflationary pressures ease. The January inflation report showed a slight acceleration in consumer prices, with the Consumer Price Index (CPI) rising by 3.0% year-on-year, the highest rate since June 2024. This development reduced the likelihood of immediate rate cuts, as the Fed remained cautious about inflationary risks.

POLITICAL INFLUENCE

Several major events impacted the markets during this period. Politically, the U.S. Presidential Inauguration saw Donald Trump inaugurated for his second term on January 20, 2025. His administration’s policies on trade and deregulation have significant implications for both domestic and international markets. In Canada, Prime Minister Justin Trudeau’s resignation led to political uncertainty, affecting investor sentiment. Additionally, a ceasefire agreement between Israel and Hamas impacted geopolitical stability in the Middle East, with potential implications for global oil prices.

NON-POLITICAL INFLUENCE

Non-political events also played a role. The U.S. announced a substantial investment in the AI project “Stargate,” aiming to bolster AI infrastructure and maintain technological leadership. This announcement was well-received by investors, particularly in the technology sector. Meanwhile, a severe winter storm in Kentucky and a market fire in Zhangjiakou, China, affected local economies. The storm disrupted transportation and supply chains, while the fire led to significant property damage and loss of goods.

FORWARD OUTLOOK

Looking ahead, U.S. equities are expected to remain volatile, influenced by ongoing policy changes and economic data. Key factors to watch include the implementation of tax cuts, deregulation efforts, and potential tariff adjustments. The fixed-income markets may experience fluctuations based on central bank policies and inflation trends. The Fed’s rate decisions will be crucial, with potential rate cuts if inflation moderates.

Global equities will likely be influenced by geopolitical developments, economic growth in major economies like China, and central bank policies in Europe and Japan. Interest rates are expected to remain a key focus, with potential adjustments based on inflation and economic growth. The Fed’s actions will be closely monitored, along with policies from other major central banks.

Overall, 2025 is poised to be a dynamic year for financial markets, with both political and non-political factors playing significant roles in shaping market trends