Muzinich Weekly Market Comment: The common thread
Insight
March 3, 2025
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In our latest roundup of the key developments in financial markets and economies, we look back on a month in which market sentiment was largely driven by one factor: tariffs.
February ended on a soft note in financial markets, but overall, it was a positive month for risk assets. In fixed income, US government bonds were the standout, with the 10-year Treasury yield falling more than 25 basis points (bps), generating a total return of over 3%.[1] The rally will be music to the ears of US Treasury Secretary, Scott Bessent, as the administration focuses on lowering borrowing costs.
Corporate credit also had a strong month, with emerging markets leading the way in high yield, driven by Asia, as confidence grows that the Chinese property sector has bottomed out and with President Xi Jinping reaffirming his support for the private sector, as we noted in last week’s Market Comment.
For investment-grade credit, the longer duration nature of the US market, combined with outperforming US Treasuries, made it a no contest with other government bonds in terms of total returns. However, it is worth noting that European investment-grade credit outperformed its respective government bond market, with spreads tightening by almost 90bps.[2]
Energy prices declined in February as geopolitical risk premia eased, driven by the ceasefire in Israel and progress in Ukraine-Russia peace talks. In contrast, metal prices rose as tariff-related risk increased. The US dollar weakened slightly across the board, reflecting uncertainty surrounding the administration’s policy agenda. Meanwhile, currencies linked to metals, such as the Chilean peso, or countries located close to Ukraine, such as the Polish zloty, outperformed.
Europe doing better than expected
The Bloomberg World Large & Mid Cap Index declined by over 3% in February. However, this masked significant divergence. European equities outperformed, with the S&P Europe 350 Index up over 3%, led by strong gains in Spain and Italy.
There were several reasons for the strength of European equities. The European Central Bank cut rates again on January 30,[3] providing a supportive backdrop for risk assets. For much of the month, there were rising hopes for a Russia-Ukraine ceasefire, while the German election resulted in a two-party coalition led by the centralist Christian Democratic Union and Christian Social Union parties, which is seen as a positive for the corporate sector. This leadership shift promises less policy gridlock and greater economic stability compared to the outgoing government.
Economic data also continues to exceed expectations in the region, with the Eurozone Economic Surprise Index moving firmly in positive territory (see Chart of the Week).
Beijing support continues
Asian equities saw mixed results in February, with Chinese equities the outperformer. The Hang Seng Index surged over 13%, driven by recent stimulus measures and heightened expectations of further policy support in March.
Last week, China announced plans to inject at least $55 billion into three of its largest banks, with the process expected to be completed by June.[4] This demonstrates support for the financial sector and a positive credit impulse for the broader economy. Meanwhile, the National People's Congress, which begins on March 5, is expected to outline a GDP growth target of around 5% and a record budget deficit of approximately 4% of GDP, reinforcing Beijing’s commitment to economic stability and growth.[5]
Elsewhere in Asia, growth concerns weighed on equity markets. Central banks in South Korea, India and, unexpectedly, Thailand eased policy by 25bps,[6] reflecting policymakers' pessimism on economic activity.
These cuts are in stark contrast to Japan, where authorities continue to prepare investors for further policy tightening amid persistent inflationary pressures. Last week, Japan’s Metal Workers’ Union demanded a record 14% year-on-year wage hike, the highest request since the union began tracking wage demands in 2014.[7] The Nikkei-225 fell by more than 6% last month, while the yen appreciated close to 3% versus the US dollar.
What happened to the US rally?
Perhaps the most striking development was the fall in North American equities, which had been widely expected to be among the top performers on the back of supportive domestic policies. President Trump’s preferred measure of success, the S&P 500, fell more than 2%, while the Nasdaq dropped 5%.
Q4 earnings season is nearing its conclusion, with 97% of S&P 500 companies having reported.[8] However, the positive earnings surprise rate is at its lowest level since Q4 2022. This week, all eyes were on Nvidia’s earnings, but these failed to ignite investors’ animal spirits. Despite strong headline figures, including record quarterly revenues, the company delivered only a modest earnings beat. Its forward guidance was unspectacular and bore little resemblance to the hype that has surrounded the chip giant over the past two years.[9]
If earnings provided no clear catalyst for equities, economic data also failed to spur optimism. A slowdown in economic momentum has pushed the US Economic Surprise Index into negative territory, suggesting economists have been overly optimistic (see Chart of the Week). The Atlanta Fed’s GDPNow model now estimates real GDP growth (seasonally adjusted annual rate) for Q1 2025 at -1.5%, as of February 28, a sharp decline from 2.3% on February 19.[10]
The T word
However, the common thread in February – driving China’s stimulus urgency, rising metal prices, falling government bond yields, concerns among central bankers in Asia’s manufacturing economies, and the underperformance of North American equities – was the continued uncertainty and ambiguity surrounding tariffs, which the US administration pushed aggressively throughout February.
Furthermore, hopes for an end to the Russia-Ukraine conflict dropped drastically on the last day of the month following the acrimonious White House meeting between Ukraine President Volodymyr Zelensky, Donald Trump and his Vice President JD Vance, which played out live in footage shown across the globe.[11]
March has historically been a weak month for investor returns, and unless common ground is found on tariffs and geopolitics, the poor end to February may continue into this month.
Chart of the Week: Have economists been too positive on US, too negative on Europe?
Source: Citi, ‘US Economic Surprise Index, Europe Economic Surprise Index,’ as of February 28, 2025. For illustrative purposes only.
Past performance is not a reliable indicator of current or future results.
References
[1] ICE Data Platform, ‘ICE BofA 10 Year US Treasury Constant Maturity STRIPS Index,’ as of February 28, 2025
[2] ICE Data Platform, ‘ICE BofA Euro Corporate Index,’ as of February 28, 2025
[3] ECB, ‘Monetary policy decisions,’ January 30, 2025
[4] Bloomberg, ‘China plans bank capital injections,’ February 26, 2025
[5] CNBC, ‘China likely to cut inflation outlook to two-decade low, lay out stimulus plans at ‘Two Sessions’ meeting,’ February 26, 2025
[6] Asia Times, ‘Asia easing fast and furious against Trump’s tariffs,’ February 28, 2025
[7] Bloomberg, ‘Japan's metalworker unions demand record pay hike,’ February 27, 2028
[8] Factset, ‘Earnings Insight,’ February 28, 2025
[9] Nvidia, ‘NVIDIA Announces Financial Results for Fourth Quarter and Fiscal 2025,’ February 26, 2025
[10] Federal Reserve Bank of Atlanta, ‘GDPNow,’ February 28, 2025
[11] BBC News, ‘How the Trump-Zelensky talks collapsed in 10 fiery minutes,’ February 28, 2025.
This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific companies are for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account. The opinions expressed by Muzinich & Co. are as of March 3, 2025, and may change without notice. All data figures are from Bloomberg, as of February 28, 2025, unless otherwise stated.
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