The US loses its shine
· UK inflation hit 3% in January, a 10-month high. US consumer price inflation also unexpectedly rose to 3% over the same period.
· The Bank of England reduced interest rates by 0.25 percentage points to 4.5%.
· US President Donald Trump stated that a trade deal with the UK is in progress, potentially avoiding import tariffs.
· Trump threatened 25% tariffs on EU imports and an additional 10% on Chinese goods, while confirming that tariffs on Mexico and Canada will proceed on 4 March.
· UK house prices rose for the sixth consecutive month in February, increasing by 0.4% (Nationwide).
· BP announced a 20% increase in oil and gas investment and a 70% cut in renewables spending as part of a major strategic overhaul.
· The US tech giant Nvidia’s revenue jumped 78% in Q4, driven by strong AI chip demand.
· Trump and Vice President JD Vance openly criticised Ukraine’s President Zelensky in a tense Oval Office press conference.
· The UK will raise defence spending by £6bn to 2.5% of GDP by 2027, funded by cuts to overseas aid.
· The centre-right CDU party won the German election with 29% of the vote.
After a strong start to 2025, February reminded investors that markets rarely move in straight lines. The narrative of US economic exceptionalism, so dominant in recent months, lost some of its lustre. Growing concerns around the administration’s policy direction weighed on corporate and consumer sentiment, reviving questions about growth sustainability. We have previously flagged that we anticipated weakness in US equities, and have positioned our client portfolios accordingly.
For multi-asset investors, the silver lining in February came from global bonds. Despite tariff concerns and inflation prints that were firmer than expected, bond markets looked past the near-term noise and focused on rising growth risks. Bond yields declined, providing a positive tailwind to government bonds. Corporate credit also held up well, with strong fundamentals keeping investment grade spreads in check.
US equities struggled under the weight of mega-cap tech concerns, while European markets took the lead. European equities outperformed the US and finished the month as the strongest major equity market as investors increasingly priced in a possible ceasefire in Ukraine. UK equities also posted positive returns, with the FTSE All Share Index gaining 1.1%. Asian equities advanced in February, led by China, where enthusiasm around DeepSeek continued to bolster sentiment in the tech sector. However, Japan stood out as an exception. The yen’s strong appreciation weighed on this currency-sensitive market.
During the month, the Bank of England (BoE) gave a grim summary of how they see the economic fortunes of the UK, whilst cutting interest rates by 0.25%. Andrew Bailey voiced concerns over the government’s efforts to lift growth, as the central bank forecast weaker activity, higher inflation, rising unemployment and a sharp deterioration in Britain’s output potential. The BoE’s Monetary Policy Committee interest rate cut meant that UK rates are now at 4.5 per cent against a backdrop of stagnant output and rising trade tensions, with two rate-setters favouring an even bigger cut by 0.5% to guard against the risks of a sharper downturn.
The weak outlook underlines the challenge facing chancellor Rachel Reeves after she pledged that growth was the government’s number one mission. It raised fresh questions about the fiscal outlook, analysts said, given the importance of stronger growth to bolster tax revenue. If the Office for Budget Responsibility, the government’s fiscal watchdog, were to issue a similarly downbeat growth outlook, it would increase the risk that the chancellor would break her self-imposed fiscal rules. Weaker growth prospects could mean the government come back for further tax rises, or are forced to cut expenditure.
In another blow to the government’s attempts to send an upbeat message on the economy, the BoE’s short-term forecasts point to an acceleration of inflation to 3.7 per cent by the middle of 2025 — far above the BoE’s 2 per cent target. Even if interest rates remain higher than recent market expectations — with only two more quarter-point cuts by the end of 2027 — the forecasts show inflation would only return to the BoE’s 2 per cent target in late 2027.
Meanwhile, GDP would grow just 0.75 per cent this year, before picking up in 2026 and 2027, and unemployment would rise to 4.75 per cent. Mr Bailey, BoE governor, sought to put a positive spin on the inflation forecast, saying the near-term jump was chiefly due to “temporary factors” that were “not directly linked to underlying cost and price pressures in the UK economy.” A 20 per cent rise in wholesale gas prices across Europe was the biggest driver, he said, along with planned increases in regulated bus fares and household water bills. But Bailey also acknowledged there was “heightened uncertainty” that could push inflation in either direction.
The biggest worry is that the BoE has become more pessimistic about the rate at which the UK economy can grow without pushing up inflation. Slightly worryingly, Mr Bailey said the “challenges reading some of the data” had made it especially difficult for the policy committee to judge what was going on. Recent data revisions showed the UK population and workforce had grown faster than previously thought, he noted — and since “we haven’t had a change in GDP, we can only conclude mathematically that productivity has got much worse.” Growth in employment has been fastest in parts of the public sector such as education and health, whose contribution to GDP is notoriously hard to measure.
February’s market action reinforced some key lessons. Investors have started to question US growth risks and whether high earnings expectations and elevated valuations remain justifiable. European equities’ strength underscored the value of regional diversification, while positive fixed-income returns reaffirmed that bonds can act as effective diversifiers against equity volatility. Our client positioning has limited exposure to large US growth stocks while maintaining meaningful allocations to defensive assets like bonds, credit and alternatives. As we have seen many times before, in an uncertain environment, diversification and discipline provide the solid foundations for investment returns.
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