The opening weeks of 2025 have been anything but smooth sailing. Financial markets are stumbling through a potential minefield of economic data points around inflation in the US, underlined by uncertainty about the actual shape of the incoming Trump administration’s economic plans. With Donald Trump back in the White House, a sense of unpredictability permeates the global economic stage. Tariffs, rising inflation, and interest rates have taken the spotlight, leaving asset prices to dance erratically to a discordant symphony of geopolitics and monetary policy.
The week’s key themes:
- Trump policies sending waves through global economy
- Mixed US economic data causes uncertainty
- Equity markets a mixed bag as rate-cut hopes in question
- Oil prices dip, while gold rallies
- US dollar stalls after six-week rally
Inflation’s persistent shadow
Inflation continues to loom large. The Trump administration’s renewed push for protectionist tariffs on imports from major trading partners promises to amplify costs for consumers and businesses alike. Paired with aggressive fiscal measures, including infrastructure spending and corporate tax breaks, the ingredients for sustained inflation are firmly in place.
The United States (US) Federal Reserve (Fed) remains resolute in response; signalling its readiness to hold the line with elevated interest rates. Their goal – to stave off inflationary flare-ups. Investors now anticipate a prolonged period of higher prices, albeit less dramatic than the inflation spikes of 2022. This outlook has propelled bond yields upward, with the US 10-year Treasury yield nearing heights not seen in years, applying pressure on growth sectors tethered to borrowing costs.
Geopolitics: the ever-present wild card
Geopolitical turbulence is adding fuel to the fire. US trade negotiations with China are on thin ice, with a retaliatory tariff war gaining traction. Energy markets, meanwhile, are grappling with volatility as sanctions and regional conflicts disrupt oil supply chains.
What was once a predictable commodity landscape has become a battleground of uncertainty, sending ripples through equity and fixed-income markets.
All asset classes balancing on a knife’s edge
If one currency rules the stage in this landscape, it’s the US dollar. Underpinned by Trump’s assertive trade policies and simmering global tensions, the greenback has regained its throne, with the US Dollar Index surging to two-year highs. For investors, this means a tilt towards US assets – particularly Treasuries – at the expense of emerging markets, which are grappling with capital outflows and the burden of dollar-denominated debt.
Equity markets reflect this turbulence. The S&P 500 is tiptoeing into this year, vacillating between gains and losses as investors weigh inflation risks against Trump’s fiscal agenda. Tech-heavy indices, like the Nasdaq, are enduring sharper swings, with rising interest rates casting a shadow over growth stocks reliant on cheap capital. Companies with robust pricing power, however, are emerging as rare winners in this fragmented market.
Fixed-income markets, on the other hand, have started the year with a bang. The 10-year Treasury yield climbed to 4.80% following strong Non-Farm Payroll data at the tail end of last week, reflecting inflation concerns and robust labour market data that diminished expectations of interest rate cuts for 2025. High-quality corporate bonds are also weathering the turbulence well; it is only their riskier, high-yield counterparts that are feeling the strain as investors shy away from increased default risks.
Looking ahead: a year of challenges
The narrative of 2025 is still in its early chapters, but the plotlines are clear. How markets respond to the interplay of US policies, global trade disruptions, and central bank manoeuvres will shape the months ahead. Corporate earnings will soon provide crucial insights into how businesses weather these storms, focusing on their ability to manage costs and maintain demand.
Meanwhile, the Fed will remain central to this unfolding drama. Any deviation from their policy script could ripple through markets in unpredictable ways.
Steady hands in rough seas
For investors, the key to survival – and success – lies in adaptability. This is a time to prioritise diversification, favour quality over speculative plays, and keep a long-term perspective. By staying informed and agile, investors can carve a steady path through the chaos that defines the start of 2025.
RECENT MARKET MOVES IN A NUTSHELL
Bonds
The 10-year US Treasury yield fell to 4.62% on Thursday, extending a two-day drop totalling 20 basis points since reaching a 14-month high earlier in the week. The decline is largely attributed to mixed data from the US. Some of the data released during the week challenged the view of a resilient US economy in a prolonged high interest rate environment. A tame consumer price index (CPI) reading supported a recovery in Treasuries, although a surge in import prices to a two-year high revived inflation concerns. Market participants are cautiously pricing in one Fed rate cut for the third quarter, with Trump’s proposed tariffs adding further uncertainty.
In the United Kingdom (UK), 10-year Gilt yields rose to 4.74%, reflecting the country’s ongoing stagflation concerns. The UK’s November gross domestic product (GDP) growth of 0.1% missed forecasts, amplifying fears of stagnation. On Wednesday, inflation data prompted a 16.2 basis-point drop in gilt yields. UK headline inflation eased to 2.5%, the smallest increase in services prices since early 2022, while core inflation softened to 3.2%. The Bank of England (BoE) is expected to make modest rate cuts this year, with two small reductions priced in. Rising national debt and fiscal policy uncertainties weigh on sentiment.
South Africa’s 10-year bond yield stood at 9.19% on Thursday, reflecting cautious optimism in a volatile global environment.
Equities
Wall Street’s rally lost momentum on Thursday. The S&P 500 fell 0.1%, the Nasdaq dropped 0.5%, and the Dow Jones slipped nearly 100 points, or 0.2%. Major tech stocks led the declines, with Apple sliding 3.6% and Tesla falling 3.9%. Investment bank, Morgan Stanley, gained 3% on strong fourth quarter results, contrasting with a 1% drop in fellow financial institution, Bank of America, despite the latter beating earnings expectations. Earlier in the week, other financial services institutions, JPMorgan Chase and Goldman Sachs, posted solid performances. Investors remain cautious, responding to dovish comments from Federal Reserve Governor, Christopher Waller, who hinted at possible rate cuts if inflation stays controlled.
The UK’s FTSE 100 climbed to a three-month high on Thursday, driven by optimism over potential rate cuts and strong mining stock performance. Rising iron ore and gold prices lifted copper miner, Antofagasta, by 2.5%, while gold miners Endeavour and Fresnillo gained over 2% each. Luxury retail brand, Burberry’s shares rose more than 4% in the FTSE 250, buoyed by fellow luxury brand, Richemont’s strong sales report. However, weaker-than-expected UK GDP growth of just 0.1% in November, tempered overall market enthusiasm.
Germany’s DAX index rose 0.3% to 20,634, continuing its record-setting trajectory. Robust corporate earnings and expectations of central bank rate cuts supported sentiment. Top performers included Technology group, Rheinmetall, which saw an increase of 4.5% and online fashion and lifestyle retailer, Zalando, which was up 2.4%, while the laggers were global energy technology company, Siemens Energy, which fell 3.6% and commercial vehicle manufacturer, Daimler Truck Holdings, which was down 2.5%.
South Africa’s main stock index, the SAALL, has dropped 436 points, or 0.52% since the beginning of the year.
Commodities
Brent crude oil prices fell below $81/barrel on Thursday, retreating from a five-month high. Markets responded to US sanctions on Russian crude and speculation that President-elect Trump might ease these restrictions after his inauguration. China and India reportedly increased purchases from Saudi Arabia to offset supply disruptions. Meanwhile, oil tankers remained stalled off China’s coast as traders navigated new sanctions. Trump’s administration is reportedly exploring strategies that could benefit Russian oil companies and facilitate Ukraine peace talks.
Gold prices rallied, reaching $2,715/ounce, a two-month high, on the back of weaker-than-expected US data. Easing CPI data in the US and similar rate cut expectations in the UK and eurozone are further supporting bullion.
Currencies
The US Dollar Index held above 109 on Thursday, reflecting mixed signals coming from US economic data.
The euro recovered to $1.03/€, rebounding from a two-year low of $1.018/€. Reports of a phased approach to US trade tariffs reduced fears of immediate inflation spikes. Attention now shifts to European Central Bank meeting minutes and upcoming eurozone inflation data for further policy insights.
The British pound hovered at $1.22/£, near late-2023 lows, amid ongoing stagflation concerns. The UK’s November GDP growth of 0.1% missed expectations, while inflation eased to 2.5%, aligning with the BoE’s forecasts. As fiscal challenges persist, markets anticipate a single quarter-point rate cut from the BoE this year.
The South African rand traded at R18.80/$, recovering slightly from its weakest level in nine months. The currency faced pressure from a strong dollar and uncertainties surrounding US monetary policy under Trump’s administration. Local inflation remained within target at 2.9% in November, with limited rate cuts expected in 2025, despite slowing growth.
Key indicators:
USD/ZAR: 18.79
EUR/ZAR: 19.33
GBP/ZAR: 22.88
GOLD: $2,710.56
BRENT CRUDE: $81.83
Sources: Refinitiv, Bloomberg and Trading Economics.
Written by: Citadel Advisory Partner and Citadel Global Director, Bianca Botes.