Global Markets Weekly Wrap KW 8 : Markets Decline as Geopolitical Tensions and Consumer Fears Grow
U.S. equity markets saw a decline over the shortened trading week as investor sentiment was affected by global political developments and worries about consumer spending. Due to the closure of markets on Monday for Presidents' Day, stocks initially saw an upward trajectory on Tuesday, leading to record-breaking closes for the S&P 500 on both Tuesday and Wednesday. However, the latter part of the week saw sharp declines that erased the earlier advances, resulting in a weaker finish for the major indices. Investors closely monitored geopolitical events and tariff policies as President Donald Trump pursued diplomatic efforts to resolve the Russia-Ukraine conflict while simultaneously announcing plans to implement new tariffs on vehicles, pharmaceuticals, and lumber. Details of these tariffs remained scarce, adding to market uncertainty.
A notable decline in investor confidence occurred on Thursday following Walmart's release of its fourth-quarter earnings. Although the retail giant exceeded analysts' expectations for the quarter, its guidance for the upcoming year fell short, raising concerns about consumer demand and broader economic health. The anxiety surrounding consumer spending was compounded by a report from the Commerce Department the previous week, which revealed that retail sales in January experienced their steepest drop in nearly two years. Consequently, Walmart's stock fell 6.53% on Thursday, dragging down the broader market.
Tariff concerns and inflationary pressures also weighed heavily on market sentiment. On Tuesday, the National Association of Home Builders published its February housing market index, which registered a decline to 42 from January's reading of 47, marking its lowest level in five months. The decline was attributed to uncertainty surrounding tariffs, persistently high mortgage rates, and increasing housing costs. In a related report, housing starts for January, which measure the number of new privately owned homes beginning construction, dropped nearly 10% from December, adjusting to an annualized pace of 1.366 million units.
In another sign of economic weakness, S&P Global reported that business activity growth in the U.S. nearly stalled in February. The flash Composite Purchasing Managers' Index (PMI) declined to 50.4, marking a 17-month low. A PMI reading above 50 signals expansion, while a number below 50 suggests contraction. The services sector slipped into contraction territory with a reading of 49.7, its lowest in over two years, counterbalancing the slight growth seen in manufacturing. Analysts attributed the decline to uncertainties regarding federal policies and increasing input costs.
Further dampening economic sentiment, the University of Michigan's consumer sentiment index dropped nearly 10% in February, falling to 64.7 from the prior month. All index components experienced declines, with buying conditions for durable goods plunging 19%, largely due to fears of price increases resulting from tariffs. Inflation expectations for the next year surged to 4.3% from January's 3.3% reading.
U.S. Treasury prices advanced during the week, buoyed by the Federal Reserve's meeting minutes, which signaled policymakers' willingness to keep interest rates steady until inflation shows sustained improvement. The release of weak PMI data on Friday further propelled Treasury prices upward. Meanwhile, municipal bonds delivered slight gains, supported by seasonal reinvestments and a reduced supply of new issuances. Investment-grade corporate bonds saw negative returns amid heavy issuance activity. High-yield bond market volumes were subdued, with only a limited number of new deals being announced, according to T. Rowe Price traders.
In European markets, the STOXX Europe 600 Index finished the week slightly higher, gaining 0.26% as investors weighed U.S. trade policy developments and diplomatic efforts regarding the Russia-Ukraine conflict. Major European stock indices displayed mixed performances. Germany's DAX declined 1% ahead of an upcoming federal election, France's CAC 40 edged down 0.29%, and Italy's FTSE MIB rose 1.17%. The UK's FTSE 100 slipped 0.84%.
Economic activity in the eurozone remained in expansionary territory for the second consecutive month, as indicated by S&P Global's flash PMI readings. The Eurozone Composite PMI Output Index remained unchanged from January at 50.2. Although this suggested continued growth, the report highlighted weaknesses, including declining new orders, job losses, rising input costs, and increased output prices. Germany saw improved output for the second straight month, whereas France experienced a notable contraction. Other eurozone nations registered robust output growth.
In the UK, the Composite PMI declined slightly from January but remained above the 50 threshold. Private sector employment fell at the sharpest rate since November 2020, largely due to mounting payroll costs and weakened demand.
Inflation in the UK surprised markets, leading investors to scale back expectations for interest rate cuts from the Bank of England. Consumer price inflation accelerated to 3% in January, the highest since March 2024, up from 2.5% the previous month. Rising transportation costs and food price increases fueled this inflationary surge. Core inflation, which excludes food and energy, increased to 3.7% from 3.2%. Wage growth also exceeded forecasts, with average earnings (excluding bonuses) rising 5.9% year-over-year in the three months through December.
UK retail sales rebounded in January, increasing 1.7% on a seasonally adjusted basis—the strongest monthly gain since August—far surpassing expectations of a 0.65% rise. Growth was largely driven by strong food sales, while non-food and clothing sales declined. GfK's consumer confidence index inched higher in February, though it remained negative amid ongoing concerns about employment and inflation.
Japanese equity markets struggled over the week as the Nikkei 225 Index dropped 0.95% and the broader TOPIX Index declined 0.82%. A strengthening yen and rising Japanese government bond yields exerted pressure on stocks. Additionally, uncertainty surrounding U.S. trade policies contributed to market volatility. The yen appreciated against the dollar, strengthening to approximately JPY 150.4 from 152.3 the previous week, following an inflation report that fueled speculation about potential Bank of Japan policy tightening. Japan's core consumer price index rose 3.2% year-over-year in January, surpassing expectations and reinforcing views that the central bank may need to take more aggressive measures to manage inflation. Economic growth data also pointed to a stronger-than-expected expansion, with GDP growing 0.7% quarter-over-quarter in the final three months of 2024, exceeding the 0.3% consensus estimate.
Chinese stock markets advanced, driven by strength in technology shares following robust earnings from major companies. The CSI 300 Index climbed 1%, while the Shanghai Composite Index gained 0.97%. The Hang Seng Index in Hong Kong surged 3.79%, led by a rally in Alibaba shares. Investor sentiment in the Chinese tech sector improved after a high-profile meeting between President Xi Jinping and leading technology executives, signaling a more supportive regulatory environment.
Elsewhere, Poland and Romania reported inflation data that influenced market expectations. Poland's inflation rate increased to 5.3% year-over-year in January, exceeding December's 4.7% reading. Analysts attributed the rise to food and energy costs, along with a pickup in core inflation. Although inflation remains a concern, expectations remain that it could decelerate later in 2025, particularly if a resolution to the Russia-Ukraine conflict leads to lower energy prices. Romania's inflation remained elevated at 5%, with stronger-than-expected month-over-month price increases, suggesting that the country's central bank may keep interest rates steady throughout the year.
Looking ahead, investors will focus on economic data releases in the coming week, including U.S. GDP growth, consumer confidence reports, new home sales data, and jobless claims. In global markets, key reports will include eurozone inflation, Germany's business climate index, South Korea's base rate decision, and Singapore's consumer price index.
Checklist for the next week:
Major economic events in the US include:
Initial Jobless Claims; GDP Annualized QoQ; Conf Board Consumer Confidence; Durable Goods Orders; MBA Mortgage Applications; New Home Sales
Major economic events around the world include:
Germany IFO Business Climate; Eurozone CPI; South Korea Base Rate; Singapore CPI; Brazil IBGE Inflation; Israel Base Rate; Hong Kong Exports