In less than two weeks since his inauguration, President Trump has issued several executive orders and outlined his policy priorities. These decisions have presented both challenges and opportunities for investors.

Since President Trump's victory in November 2024, he has been a focal point for market dynamics. His inauguration marked an increase in market volatility, driven by both his proposed actions and the policies he has temporarily set aside. Policy implications from Washington are now a key consideration for policymakers worldwide. Both equities and fixed income faced some challenges in January. Tech and artificial intelligence (AI) related stocks were shook by the emergence of a Chinese AI model DeepSeek. Developed market government bond yields spiked due to fiscal concerns.

Executive decisions in focus

In less than two weeks since his inauguration, President Trump has issued several executive orders and outlined his policy priorities. These decisions have presented both challenges and opportunities for investors.

President Trump has used tariffs more as a tool for border security than for rebalancing trade. He has signed off on a 25% tariff against Canada and Mexico for insufficient efforts to curb illegal immigration and fentanyl trafficking into the U.S. He has also implemented a 10% tariff on China. Canada has already retaliated with a 25% counter tariff on CAD 155billion of U.S. exports to the U.S. Mexico and China have both pledged to take counter measures.

Tariffs appear to be the preferred method for gaining leverage over U.S. trade partners on various issues. The foreign exchange market has been particularly sensitive to these tariff threats, fluctuating with the president's real-time positions. The risk of higher inflation in the U.S. and potentially lower growth could induce additional volatility in both the fixed income and equity markets.

Questions also arise regarding the strategic direction of renewable energy and electric vehicles (EVs) in the U.S. President Trump announced the U.S. withdrawal from the Paris Climate Agreement and has reversed several policies supporting the EV industry. He has also halted renewable energy projects on public lands and waters, while increasing support for the fossil fuel industry.

Immigration is another contentious area in executive orders, though the impact on labor supply has been limited. Business leaders have expressed concerns about restrictions on work visas for overseas talent and the potential impact on labor-intensive sectors if undocumented workers are deported.

Trump also announced the "Stargate" project, a USD 500billion investment plan to build AI infrastructure in the U.S., seen as a strong endorsement of AI development amid competition from Chinese developers. The emergence of a Chinese AI model called DeepSeek has challenged the notion that future AI development would require expensive investment in infrastructure and put a spotlight on the risk of AI functionalities being commoditized due to competition.

While AI developers and hardware manufacturers have experienced valuation de-rating on the back of this new competition, the reaction in other sectors has been relatively muted.

Questions over fiscal sustainability

Developed market government bond markets faced a challenging start to the year. Ten-year bond yields in the U.S. and Germany reached six-month highs, while the UK and France saw their highest yields in over a year. Although Trump's policies are arguably inflationary, this was not the primary driver of higher bond yields in Europe. A key concern across these markets is fiscal sustainability.

In the U.S., the Congressional Budget Office forecasts an average fiscal deficit of around 5.7% of gross domestic product (GDP) for 2026-2035, excluding potential extensions of the 2017 Tax Cut and Jobs Act. This level of deficit and rising federal debt may lead investors to demand higher risk premiums on U.S. Treasuries.

Similar concerns exist in the UK and euro area, where the near-term growth outlook is more challenging. The UK faces weak growth and potential inflation rebound, with the Labour government struggling to consolidate its fiscal position. Political tensions in Germany and France complicate fiscal consolidation, especially as defense spending and green investments continue to demand resources.

Despite higher yields and a subdued growth outlook, European equities outperformed in 2025, with the MSCI Europe (in USD) up 4.5% in January. Consumer discretionary, particularly luxury brands, and industrials led this rebound.

An internal or external catalyst

China met its 2024 GDP growth target of 5%, but investors are more focused on potential measures from Beijing to boost growth, especially after weak official Chinese National Bureau of Statistics (NBS) manufacturing and service purchasing managers’ index (PMI) data for January. There will be a data blackout until March, following the National People’s Congress meeting on March 5. Markets are awaiting measures to boost growth and public confidence, including innovative ways to revive the real estate sector and labor market. We believe domestic policy catalysts could improve market sentiment.

Another potential catalyst could be a less contentious U.S.-China relationship. As mentioned, President Trump is approaching tariffs against China more tactfully, which is reassuring for investors. However, the near-term outlook remains uncertain, given the hawkish stance of some senior cabinet members. This may lead investors to view China as a tactical opportunity in the short term, while waiting for economic fundamentals to improve before considering a more strategic position.

Global economy:

  • The U.S. December core consumer price index (CPI) rose to show a milder month-over-month (m/m) growth than expected at 0.2%. As anticipated, the Federal Reserve (Fed) kept rates steady at 4.25% to 4.50% in the January Federal Open Market Committee (FOMC) meeting, ending a three-month streak of rate cuts, with the statement tilting modestly hawkish. They will likely stay on hold until greater policy clarity, absent any sharp deterioration in the data.
    (GTMA P. 28, 29, 30)
  • The European Central Bank cut its key rates by 25 basis points (bps) as expected, hinting at a March cut as well. The Bank of Japan (BoJ) hiked rates by 25 bps to 0.5%, matching expectations. Officials noted economic developments moving in line with the BoJ’s outlook, with the report forecasting inflation metrics remaining above 2% throughout FY26. Japan’s core CPI rose 3% year-over-year (y/y) in December, the highest since August 2023.
    (GTMA P. 18, 19, 20, 21)
  • China’s official manufacturing PMI was at 50.1 in December, slightly below consensus and the prior month’s reading, but non-manufacturing PMI was notably higher. China’s 4Q GDP grew 5.4%, bringing 2024 annual growth to 5% and meeting the official target. The underlying data showed consumption recovering slightly, with industrial output on new economic sectors as well as export data showing robust growth.
    (GTMA P. 5 ,6 ,7 ,8).

Equities:

  • The MSCI AC World rose 3.3% in January, driven by developed markets, with the S&P 500 up 2.7% (touching record highs over the month) and the STOXX 600 up 6.3%. Trump’s inauguration invigorated hopes of deregulations and tax cuts, while tariffs posed an overhang on markets. Within the S&P 500, communication services outperformed at 9%, followed by health care at 6.6%, while information technology dragged with a -2.9% return. China’s DeepSeek sparked scrutiny into U.S. tech companies’ business models, profitability outlook and capex plans, weighing on sentiments for the sector. In Europe, rate proxies performed well, such as financials.
    (GTMA P. 33, 34)
  • The MSCI Asia ex-Japan rose 1.3% in USD terms, but was volatile over the month due to trade uncertainties, developments in the technology sector, etc. The China market fell in the first two weeks but picked up momentum toward the end of the month on positive news on DeepSeek, while tech stocks from Japan, Taiwan and South Korea saw sentiment fall. Elsewhere, Southeast Asia underperformed, notably, Philippine SE Comp fell -10.2% and Bangkok SET fell -6.1%, dragged by weak economy data and outlook.
    (GTMA P. 33, 41)

Fixed income:

  • Developed market Treasury yields broadly rose mid-month before retreating. The U.S. 10-year Treasury yield increased to 4.8% mid-month before retreating to 4.5% at the end of the month, holding steady after the January FOMC meeting. Similarly, 10-year Gilts also peaked at 4.9% mid-month, but were down 3 bps m/m. The U.S. Treasury curve steepened slightly.
    (GTMA P. 55, 60)
  • Corporate credit spreads generally narrowed in January, with U.S. investment grade bonds narrowing by 1.4 bps and U.S. high yield bonds narrowing by 26.2 bps, generally leading to a fall in corporate bond yields. As a result, credit markets were marginally higher, with global aggregate up 0.57%, and U.S. high yield outperforming with a 1.37% return.
    (GTMA P. 56, 58, 59)

Other financial assets:

  • Gold rose 7.8% in January to end the month at USD 2812/troy oz, reaching new record highs and representing the precious metal’s best month since March 2021. This was driven by safe haven demand from U.S. tariff concerns and partly by a weaker U.S. dollar. Oil prices were also up due to concerns over supply disruptions in Russia and tariffs on Canadian oil imports into the U.S.
    (GTMA P. 73, 74, 75)
  • The USD weakened slightly in January, underperforming major Asian currencies. Notably, the Japanese yen strengthened by 1.5% m/m on expectations and realization of a BoJ hike. The Korean won also rose 1.3% as the political situation gradually steadied. However, the Chinese yuan hit a fresh multi-month low against the USD with bond yields falling, before recovering due to central bank support. The currency ended the month 0.5% higher.
    (GTMA P. 13, 15, 74, 75)
 
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