STOCK MARKETS

Global Performance & Sentiment:

Global equities (MSCI ACWI) ended Q1 nearly flat, masking significant underlying volatility and regional divergence. A clear theme emerged as investors rotated capital away from the US towards the Eurozone and parts of Asia, seeking perceived safety or relative opportunity amid US policy uncertainty. Investor sentiment deteriorated sharply across multiple surveys (UMichigan, Florida CSI, Conference Board, AAII), reaching levels of pessimism not seen since mid-2022. Stagflation fears became a key driver of this slump. US consumer sentiment was also heavily influenced by partisan views. Australian director sentiment showed tentative improvement but remained wary.

 US Markets:

US equities experienced a significant correction. The S&P 500 fell 4.3% in Q1, erasing strong post-election gains after an almost 11% drawdown from its February peak. The Nasdaq Composite suffered steeper losses. The sell-off was driven by tariff fears, potential negative impacts on corporate earnings (especially Big Tech, which lost trillions in market value), fragile sentiment, and broader economic uncertainty. Value stocks outperformed growth significantly in the latter part of the quarter. While the correction reduced valuations from previously elevated levels, P/E ratios remained somewhat high historically. Analysts suggested the market was becoming tactically attractive, favouring large-cap value and defensive sectors (Healthcare, Utilities, Consumer Staples, Financials) less exposed to trade risks. Some saw potential opportunities in beaten-down areas like EM, REITs, and small caps after the selloff. Schwab moved all sector ratings to neutral (Marketperform) due to the high policy uncertainty.
 

European Markets:

European stocks (Euro Stoxx 50 +5.9% YTD, STOXX 600) markedly outperformed the US, driven by fiscal stimulus expectations (German defence spending), relatively attractive valuations, and investor inflows seeking diversification. Defence stocks were notable outperformers.

Asian Markets:

• China: Equities rallied strongly, supported by government stimulus aimed at hitting the ~5% GDP target and cushioning tariff effects. The property sector remained a drag.
• Japan: The Nikkei underperformed due to tariff sensitivity and BoJ tightening expectations.
• Developing Asia: ADB forecasted moderate growth (4.7% in 2025), supported by domestic demand but facing headwinds from trade uncertainty. Tech exporters benefited from global demand.
• South Korea: FTSE Russell confirmed South Korea remains on track for full inclusion in the FTSE World Government Bond Index (WGBI) by November 2026 (phased over 8 months starting March 2026). Greece and Vietnam remained on the equity watchlist.

Sector Performance (US - Q1):

Energy (+10.0%) and Health Care (+4.2%) were the only S&P 500 sectors with positive returns. Utilities (-0.2%) and Consumer Staples (-0.7%) held up relatively well. Consumer Discretionary (-15.2%) and Technology (-16.8%) lagged significantly.

Volatility:

Market volatility (VIX) surged, reflecting extreme uncertainty, and is expected to remain high.

M&A and Investment:

Global M&A activity showed YoY improvement but remained low relative to market cap. Strategic growth needs, corporate simplification, AI, and cross-border deals were key drivers.

CURRENCIES (FOREX):
 

• US Dollar (USD): The DXY index fell sharply (-4.3% Q1), one of its worst quarterly starts, as US growth concerns and policy uncertainty eroded the 'US exceptionalism' narrative. The outlook turned more cautious, with potential for further weakness after any short-term tariff-related bounces.
• Euro (EUR): Strengthened significantly against the USD (+5.1% Q1), benefiting from relative economic optimism, fiscal policy expectations, and favourable capital flows.
• Japanese Yen (JPY): Surged (+10.3% Q1 vs USD), acting as a primary safe-haven asset alongside gold, driven by risk aversion and BoJ policy expectations.
• Other Majors (GBP, AUD, NZD, CAD): Generally gained against the USD. CAD was the notable underperformer due to trade sensitivity.
• Chinese Yuan (CNY): Remained broadly stable under policy guidance.
• Emerging Market Currencies: Mixed performance. Argentina notably dismantled currency controls as part of a new IMF deal. The Turkish Lira and Indonesian Rupiah faced significant pressure.

COMMODITIES:

Energy:

• Oil: Brent crude ended Q1 slightly lower after significant volatility. Prices were pressured by tariff impacts on demand forecasts, recession fears, a stronger dollar initially (later reversed), and signs of sufficient supply despite OPEC+ managing output. Forecasts generally centred around $60-$70/bbl for WTI/Brent.
• Natural Gas: European prices (TTF) retreated from early-year highs. Demand concerns lingered due to seasonal factors (approaching spring shoulder season) and weak industrial activity in Europe. US prices consolidated.
• Global Trends: IEA noted slowing energy demand growth expectations for 2025, potentially covered by clean energy expansion.

Metals:

• Gold: Had a stellar quarter, surging over 16% to new record highs (touching $3,262/oz week ending April 11th). Intense safe-haven demand fuelled by trade wars, geopolitical risks, policy uncertainty, and stagflation fears drove the rally.
• Silver: Also rallied strongly, gaining 4.7% in the week ending April 11th.
• Industrial Metals (Copper, Aluminum): Posted strong Q1 gains (+13% and +11% respectively), reacting to tariff news, Chinese stimulus, and specific supply dynamics. Copper gained over 5% in the week ending April 11th alone.
• Iron Ore: Faced headwinds from high Chinese inventories.

Agricultural: Coffee prices jumped (+18% Q1). Wheat prices declined amid expectations of sharply lower global trade volumes.

BONDS & RATES:

Central Banks & Policy Rates:

• Federal Reserve (US): Held the Fed Funds rate steady at 4.25%-4.50% throughout Q1. Despite market pricing anticipating cuts sooner due to growth fears, the Fed adopted a cautious, data-dependent stance, particularly as inflation remained sticky and tariff impacts were unclear. Stagflation concerns complicated the outlook. Median FOMC projections saw rates at 3.9% by end-2025.
• European Central Bank (ECB): Cut the deposit rate by 25bps in March to 2.50%, continuing its easing cycle as inflation moderated. Further cuts were expected in Q2 (ABN AMRO forecasts 1.5% by Sept), but fiscal expansion plans could limit the extent of easing.
• Bank of Japan (BoJ): Markets anticipated further tightening.
• Other Developed Markets (BoE, RBA, BoC): Began or signalled cautious easing. KPMG expects the BoE to cut three more times in 2025.

Government Bond Yields:

• US Treasuries: Yields declined significantly in Q1 (10-year down ~22bps to 4.21%, 2-year down ~60bps to 4.36%) on growth concerns and safe-haven flows. The yield curve briefly normalized. Concerns grew about Treasury demand due to fiscal trajectory worries and potential reduced foreign buying linked to trade tensions, evidenced by tightening swap spreads (Nomura, Citi).
• European Bonds: German 10-year Bund yields surged (>40bps to ~2.77%), sharply diverging from Treasuries due to fiscal/defence spending expectations. Investor flows favoured Eurozone bonds.
• Japanese JGBs: Yields hit multi-year highs.

Inflation:

• US: Remained persistent and above target (Q1 CPI 2.8%). Year-end forecasts were revised higher due to tariffs (Fed median PCE 2.7%, Fannie Mae CPI 3.2%). Inflation expectations in consumer surveys (UMich) jumped significantly in April, reinforcing stagflation fears.
• Euro Area: Continued disinflationary trend (Feb headline 2.4%, core 2.6%), supporting ECB easing.
• UK: KPMG forecasted inflation peaking near 3.6% in Autumn 2025 before returning to target in mid-2026.
• Developing Asia: Disinflation expected to continue (ADB).

Credit Markets:

Spreads widened modestly in Q1 but remained historically somewhat tight. Sovereign bonds were generally preferred over corporate debt. US Investment Grade returned +1.0% in Q1, while High Yield lost -2.6%. Analysts (e.g., BlackRock) advised reducing risk exposure heading into Q2.