- Equities: Earnings boosted US markets; Europe, Japan, and China benefitted from the delay of reciprocal tariffs by the US; Hong Kong market soared on AI themes
- Credit: Amid policy uncertainty and overheating concerns, negative rate-spread correlation confers stability to high-quality IG credit
- FX: USD’s downside risks materialising
- Rates: Market volatility has converged with Trump’s policies overtaking Fed as the key driver; duration fears have receded
- The Week Ahead: Keep a lookout for US Change in Initial Jobless Claims; Japan CPI
Equity markets posted solid performances. Positive sentiment from the delay of reciprocal tariffs by the US benefitted global markets. US stock markets rose, boosted by earnings, but higher-than-expected inflation data tempered market sentiment. The Dow Jones, the S&P 500, and the NASDAQ gained 0.5%, 1.5%, and 2.6% respectively for the week.
In Europe, the STOXX 600 gained 1.8% as the Eurozone economy grew 0.1%, better than expected. UK GDP expanded 0.4% in Dec 2024. The FTSE climbed 0.4%. Benefitting from Japanese yen weakness, the Nikkei 225 gained 0.9%. Investors flocked to China and especially Hong Kong markets to invest further into AI and related stocks. The SHCOMP advanced 1.3% and the Hang Seng Index rocketed 7.0% respectively for the week.
Topic in focus: “Higher for longer” narrative presents upside potential for banks. The Federal Reserve began cutting interest rates last year, leading to general expectations for gradual decline in borrowing costs throughout 2025. However, potential inflationary pressures from Trump-era policies could slow the pace of rate cuts, creating upside earnings risks for banks. Nonetheless, global banks remain better insulated from further rate reductions through balance sheet management and by increasingly prioritising non-interest income (non-NII) growth as evidenced in recent earnings releases.
Tailwinds extend beyond Net Interest Income (NII) growth. Looking at the 4Q24 earnings results of major US banks, we can see robust performance from JP Morgan (JPM), Citigroup (Citi), and Bank of America (BOA) with revenues and earnings exceeding street expectations. These strong earnings results were driven by segments other than NII growth. Investment banking revenue was a key driver with JPM, Citi, and BOA all reporting stronger-than-expected investment banking fees. Furthermore, Trump’s pro-business agenda could lead to further deregulation in the M&A space with a more lenient antitrust stance and faster approval processes. This could, in turn, drive a surge in deal activities, providing a significant boost to banks' investment banking revenues.
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