Introduction
The FTSE 100 hit record highs in January, as Donald Trump took office for the second time. The announcement of US trade tariffs on Mexico, Canada and China have caused some turbulence and whilst the EU seems to be in Trump’s line of sight next, there are strong hints that the UK may have a route to more favourable treatment.
UK
The FTSE 100 hit a record high of 8,646.88 points on 30th January 2025, marking a 6.1% monthly gain—the largest since November 2022. Investors are anticipating a 25-basis-point interest rate cut from the Bank of England on 6th February, potentially lowering the base rate to 4.5%, its lowest in 18 months. Confidence also grew in January with hopes that a trade war might be avoided, boosting sentiment in UK and European markets.
The FTSE 250 also rose, though less sharply, indicating domestic policies are influencing equities. Aerospace and defence sectors performed strongly, with companies like Smiths Group seeing share price gains following strategic moves.
In political news, Torsten Bell was appointed pensions minister in mid-January after Emma Reynolds shifted roles during a mini reshuffle. Bell, a respected economist and former Chief Executive of the Resolution Foundation, is considered a credible choice. His appointment was welcomed by the financial services sector, with speculation he could be a future candidate for Chancellor. The pensions minister role has seen frequent turnover, so his stability could make a positive impact.
These developments paint a mixed yet optimistic picture for UK markets and policy heading into February.
Europe
The Eurozone faced challenges in 2024, and its economies remain fragile. In January 2025, Trump announced plans to impose trade tariffs on the EU, dampening a strong start in European stock markets. Concerns over high valuations in the U.S., worsened by tech sector volatility, led European investors to favour domestic markets for the first time in years. Nvidia’s reaction to China’s DeepSeek threat may have pushed them to seek alternatives to U.S. investments.
External trade vulnerabilities persist, with U.S. tariffs on Canada, Mexico, and China sparking fears of further EU-targeted measures. This led to drops in major indices like Germany’s DAX and France’s CAC in early February. However, Eurozone government bond yields rose as January’s PMI data exceeded expectations, reflecting a slight rebound in manufacturing and investor optimism.
The European Central Bank (ECB) cut its key interest rate to 2.75%—the fifth reduction since last summer—to stimulate the sluggish economy. With weak growth and potential trade tensions, further cuts are expected, and another reduction in March appears likely.
United States
Donald Trump took control of the White House on 20th January, quickly signing several executive orders. In the tech world, Artificial Intelligence (AI) dominated US stock market news following the emergence of China’s AI startup, DeepSeek. The announcement of its cost-effective AI model put pressure on the US tech market, with Nvidia’s stock dropping nearly 18%. Trump called it “a wake-up call,” but while DeepSeek may be efficient, it lacks the processing power of US alternatives. How US tech responds will be key as billions have been invested in AI.
On 31st January, the White House announced new tariffs: 25% on imports from Canada and Mexico, and 10% on goods from China, effective 1st February. This triggered market volatility, with the Dow Jones dropping over 500 points. Canada vowed retaliation, while Europe became Trump’s next target. Economists warned US consumers could face higher prices and inflation, potentially stunting growth.
Despite these challenges, investor optimism stayed strong. A Gallup poll showed 61% of Americans expected the stock market to rise in the next six months, the highest confidence since 2001. Before the election, Trump was seen as good for markets, and that sentiment remains.
Far East
In China, the CSI 300 Index dropped 2.9% on the first trading day of the year, marking its worst New Year start since 2016. Concerns over U.S. tariffs and a slowing domestic economy drove the decline. To stabilize markets, the Chinese government mandated mutual and pension funds to increase holdings in local A-shares. Mutual funds must boost investments by at least 10% annually for three years, while commercial insurance funds must allocate 30% of new premium revenue to the stock market.
Chinese government bond yields fell, reflecting fears of deflation and economic slowdown, though global investors continued buying Chinese bonds. Manufacturing showed contraction, with the PMI falling to 49.1 in January from 50.1 in December, signaling a decline in economic momentum. Lunar New Year holidays and weak domestic demand contributed to this drop.
In response to U.S. tariffs on Chinese goods, China introduced export restrictions on critical minerals like tungsten and molybdenum, raising concerns over supply chains and potential trade wars.
Meanwhile, Japan’s central bank raised its key interest rate to 0.5%—its highest since 2008—to meet its 2% inflation target. Tokyo’s core inflation hit 2.5% in January, exceeding expectations and signaling accelerating price pressures. Financial markets in Japan began 2025 on a strong note.
Emerging Markets
Global trade tensions will inevitably have an impact on many emerging economies, with Mexico immediately affected by the 25% trade tariff announcement. Increased consumer demand and technological development have the ability to drive growth in this sector but a strengthening U.S. dollar and rising interest rates will put many countries under pressure.
Despite significant foreign investor withdrawals, fund managers at the World Economic Forum in Davos viewed India as a promising medium-to-long-term investment destination. Factors contributing to this favourable outlook included India’s robust economic growth potential, large consumer base, limited exposure to U.S. tariffs and a strategic shift away from China. However, the Reserve Bank of India was anticipated to cut interest rates for the first time since May 2020 to stimulate economic growth, which had declined to a four-year low.
The Central Bank of Brazil raised its key interest rate, the Selic, by a full percentage point to 13.25% to combat persistent inflation, marking the fourth consecutive increase and the first under new President Gabriel Galípolo. Inflation remained high, with consumer prices up 4.5% year-on-year through mid-January, far above the 3% target.
Egypt’s non-oil private sector experienced growth for the first time since August, achieving its best performance in over four years. S&P Global’s PMI rose to 50.7, indicating an expansion driven by improved domestic market conditions and softened cost pressures. A ceasefire between Israel and Hamas likely bolstered market confidence, though long-term economic stability remained a concern among firms, impacting business expectations and hiring.
Conclusion
The noise from the US is undoubtedly creating some volatility. Whether from Trump’s trade wars or tech stock competition, it’s having a significant impact on global markets. However, there are reasons to remain positive as equity markets are still buoyant overall.
If a return to interest rate normalisation was the theme for 2024, Trump’s trade war and tech stock volatility may be recurrent themes for 2025.
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