Market overview
Last week, the MSCI All Country World Index (MSCI ACWI) declined by -1.1%, bringing its year-to-date (YTD) performance to 4.1%. This downturn was reflected across various global markets, influenced by a mix of economic data, geopolitical developments, and investor sentiment.
United States
President Donald Trump’s efforts to end the Russia-Ukraine conflict and his announcement of additional tariffs were key topics last week, although details of the planned tariffs remained limited.
Despite markets being closed on Monday for Presidents’ Day, stocks started the week on a positive note, with large cap reaching record highs on Tuesday and Wednesday. However, sharp losses in the latter half of the week erased early gains, leading to an overall decline of -1.6% (2.4% YTD). Growth stocks underperformed value shares at -2.8% (0.9% YTD) and -0.9% (4.1% YTD) respectively. Small-cap stocks dropped by -3.7% (-4.1% YTD), and tech-heavy stocks saw a decline of -2.5% (1.2% YTD).
The United Kingdom
The latest UK inflation and wage data prompted financial markets to significantly reduce bets on three interest rate cuts by the Bank of England this year. Annual consumer price growth accelerated to 3% in January, driven by higher transport and food prices. Meanwhile, average wages—excluding bonuses—rose by 5.9% annually in the three months through December, indicating a resilient labour market. The jobless rate remained stable at 4.4%, slightly below the consensus forecast. Additionally, UK retail sales volumes in January surged by 1.7% sequentially, the first monthly increase since August, driven by strong food sales.
Reacting to the news, large and mid-cap stocks were down by -0.6% (6.3% YTD), and -1.4% (0.2% YTD) respectively. The British pound remained stable against the US dollar, ending the week at US$1.26.
Europe (excluding the United Kingdom)
In Europe, the MSCI Europe ex UK Index ended the week 0.4% higher (10.6% YTD) amid cautious optimism as investors weighed US trade policy developments and efforts to end the Russia-Ukraine conflict.
Germany’s large cap lost -1.0% (11.9% YTD) ahead of the federal election, while France’s retreated by -0.3% (10.6% YTD). In contrast, Italy’s large cap gained 1.2% (12.8% YTD) and Switzerland’s rose by 0.8% (11.7% YTD). The euro remained stable against the US dollar, ending the week at US$1.05.
Victory for Merz in German election
The weekend's German election resulted in a victory for the conservative CDU/CSU bloc, led by Friedrich Merz. The CDU/CSU secured the largest share of votes, but without an absolute majority, making a coalition necessary. The most likely coalition partner is the Social Democrats (SPD), which would form a two-party "Grand coalition."
The far-right Alternative for Germany (AfD) party also made significant gains, securing 19.9% of the vote and becoming the second-largest party in the Bundestag. This marks the best outcome for the AfD since its founding, reflecting growing support for its anti-immigrant and nationalist policies. Despite this surge, the AfD is unlikely to be part of the government, as other parties have ruled out forming a coalition with them.
Friedrich Merz has promised tax reforms – including reducing income taxes and corporate tax rates –as well as stricter migration policies. The election outcome has already had a positive impact on markets, with the euro strengthening and Germany's benchmark stock gauge advancing. Investors are optimistic that the new government will pivot towards increased spending, potentially easing the path towards economic reforms and boosting Germany's presence in the EU.
Overall, this outcome is seen as positive for the German markets in the coming weeks, as it is expected to lead to increased spending and pro-business policies.
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