2025 began with a month of contrasts: on the one hand, the central banks acted in line with expectations (the ECB cut rates by 25 bps, with no changes by the Fed) and gave stability to the market. In other assets, however, several factors stirred up the market: sovereign debt and currencies suffered fluctuations both due to the gradual disinflation in the euro area and the US and as a result of the first economic policy moves of the Trump administration. In equities, China’s advances in artificial intelligence with DeepSeek caused sharp price corrections for tech companies throughout the West, although in many cases they did not last. In the commodities market, meanwhile, European natural gas and precious metal prices surged. With all this, the beginning of the year exemplifies how political and geo-economic risks can continue to steer the market.

In particular, the ECB placed the depo rate at 2.75%, with the fifth 25-bp cut since last June. Although interest rates remain in restrictive territory, Lagarde appeared confident that they will continue to fall. Money market implicit rates point to a further cut of 25 bps in March and anticipate that the depo rate will stabilise between 1.75% and 2.00% in the second half of 2025. For its part, the Fed kept rates unchanged (fed funds rate in the 4.25%-4.50% range) and Powell indicated that they were not in a hurry to lower rates and preferred to wait to assess the impact of Trump’s economic measures. With this, money market implicit rates are anticipating that the Fed will lower rates to around 4.00% towards the end of 2025, which would entail between one and two cuts of 25 bps in the year as a whole. The Bank of Japan, on the other hand, raised rates by 25 bps (the benchmark rate now stands at 0.50%) and revised its inflation forecasts upwards. In addition, in recent weeks, several bank officials have shown a willingness to continue to raise rates in light of the prospect that inflation could leave behind the weakness of recent decades more permanently.

Sovereign rates began the year prolonging the rebound which they began in December, especially in the long sections of the curve, in the face of greater future economic uncertainty. This trend reversed mid-month, following the publication of better-than-expected core inflation data in the US, and lasted up until the last week, when the protectionist rhetoric of the Trump administration intensified. The announcements regarding US tariffs resulted in a reduction of sovereign interest rates in both the US and the euro area. Moreover, there was a tightening of the periphery’s sovereign risk premiums, with that of France performing somewhat better (after Ecofin endorsed the Commission’s fiscal recommendations). In this context, Japanese sovereign rates picked up following the hikes by the central bank, while British debt – for which the 10-year benchmark reached its highest level since 2008 – recorded setbacks in the month, which were more intense in the short sections of the curve due to the lack of buoyancy in the economic data and the moderation of core inflation.

European indices led the gains, with Germany’s DAX, France’s CAC and Spain’s IBEX at the helm. However, the market gains were not linear and the final stretch of the month was marked by widespread and significant setbacks in the tech sector throughout the West following the launch of DeepSeek, which weighed down the general indices given the sector’s large capitalisation. These falls, however, moderated in most companies once investors recalibrated the impact of this innovation on future profits. Emerging stocks in Latin America also posted gains, especially the Brazilian stock market, with a more positive perspective among investors regarding the country’s fiscal outlook since the announcement of government spending cuts in late 2024.

The dollar closed the month practically flat, albeit not without movements, in line with the performance of sovereign rates and for similar reasons. The euro also followed a specular pattern to that of the dollar, fluctuating with the perceived risk of the US imposing tariffs on the EU. The yen, meanwhile, clearly appreciated against the dollar, backed up expectations of rate hikes by the Bank of Japan. Among emerging currencies, most notable was the appreciation of the Brazilian real, in a context of recovery of Brazil’s various financial asset classes. On the other hand, the Mexican peso and the Canadian dollar, which followed a very similar pattern during the month, depreciated (especially the peso) following the announcement of tariffs by Trump, and despite the fact that these were finally put on hold.

In an environment of rising prices, the increase in that of natural gas in Europe stood out: the Dutch TTF exceeded 50 euros/MWh, reaching its highest levels since 2023. This increase was driven by European reserves declining faster than in previous years (although they remain at high levels) and a context in which Russian gas is no longer flowing through Ukraine since the beginning of the year. Oil closed the month slightly up, while precious metals made notable advances, favoured by their role as a safe-haven asset in an environment of greater uncertainty surrounding trade. Finally, agricultural commodities also recorded price increases, driven up by the supply risk posed by dry weather in several Latin American producing countries.