Market Update – 19th February 2025.

This week, the spotlight was on Ukraine-Russia peace talks, as US and Russian officials met in Saudi Arabia. The US administration said it would hold direct talks with Russian President Vladimir Putin to end the war, excluding Kyiv from any discussion and allowing Russia to keep any Ukrainian land it had seized. President Trump has also mentioned that the U.S. is interested in securing 50% of Ukraine’s rare earth minerals. Investors are closely monitoring these US-led negotiations, particularly given the current absence of EU and Ukrainian representatives from the discussions.

The week began with subdued trading, as US markets were closed for Presidents’ Day on Monday. In contrast, UK and European stocks saw modest gains, driven by a surge in defence sector stocks. Arms manufacturers saw notable increases following Trump’s calls for NATO members to significantly boost military spending.

UK CPI data for January showed an unexpected rise in inflation to 3%, driven mainly by higher transport and food prices. Core inflation, which excludes energy and food, also increased to 3.7% from 3.2% in December. Earlier this month, weak growth and easing inflation led the Bank of England to cut interest rates to 4.5%, with more reductions expected. However, the Bank warned that rising global energy costs and regulated price changes could push headline inflation to 3.7% by Q3 2025.

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UK job data released on Tuesday also revealed that the unemployment rate remained steady at 4.4% for the period from October to December 2024, surpassing expectations for an increase to 4.5%. The data also showed that wage growth remains strong. Average earnings, including bonuses, rose by 6% year-on-year, up from 5.5% in November. Pay growth, excluding bonuses, marked its third consecutive increase, driven by gains in both the private and public sectors.

While the UK labour market showed more resilience than anticipated over the Christmas period, with lower-than-expected unemployment and rising wages, there are concerns that this could be a final seasonal boost before tougher times ahead. With rising living wages and a hike in employers’ national insurance contributions, many large employers have indicated they may look to trim labour costs before the tax hikes in April.

Japan’s exports grew 7.2% year-on-year in January, up from 2.8% in December but slightly below the 7.7% market forecast. The US was a key driver, with shipments to the world’s largest economy rising 8.1%, likely due to businesses front-loading orders ahead of potential US tariff measures under Trump’s trade policies. Meanwhile, imports surged 16.7%, far exceeding both December’s 1.7% gain and the 9.3% market consensus, reflecting stronger domestic demand and rising global costs.

Still to come this week we have the FOMC meeting minutes, Eurozone consumer confidence, Japan’s CPI and UK retail sales.

Nicola Tune, Portfolio Specialist