February Review 2025
EQUITY MARKETS
The FTSE100 increased by 3.5% during February to close out above 8800 points. The index benefitted from European defence stocks reaching new record highs, the UK-listed BAE Systems and Rolls Royce Holdings saw their valuations soar as anticipated increases in defence spending gripped the market. Prices were further boosted after both BAE and RR reported earnings which surprised analysts’ top estimates. Rolls Royce issued new 2025 guidance of £2.7bn-2.9bn underlying operating profit and £2.7bn-2.9bn free cash flow; delivering on their Capital Markets Day mid-term targets two years earlier than planned. BAE Systems raised its annual dividend by 10% to 33.0 pence per share and reported robust financial results, including a 14% revenue increase to £26.3bn in 2024 and a slight uptick in pretax profit to just over £2.3bn. Share prices are up by 32.5%(RR.) and 30%(BAE) respectively on the month, and the trend in the defence sector appears set to continue given the geopolitical uncertainty in Europe.
Despite US market leader NVIDIA reporting a 78% year-on-year growth in revenue last week of $39.3bn for Q4, earnings season in the US was muted by concerns surrounding tariffs and government cuts by Elon Musk’s newly led Department of Governmental Efficiency (DOGE). Potential new export restrictions to China and uncertainties related to tariffs contributed to a market sell-off towards the tail-end of the month with the S&P500 closing down 0.67% at 5955. Last year’s best performing US equity Palantir, which derives over 40% of its revenue from government contracts fell from grace after being faced with potential U.S. Defence budget cuts. Reports indicating that the Trump administration is considering reducing military spending by 8% annually over the next five years also coincided with a 10mn unit stock sale announcement from CEO Alex Karp leading to a 33% dump from its February 18th peak.
The emergence in January of artificial intelligence start-up DeepSeek, which has released efficient, low-cost AI models, renewed investor interest in the Chinese technology sector and ignited a bull market in the main benchmark for the country’s tech stocks. The Hang Seng Index rose by 17% in February boosted by Alibaba Group. Touted as China’s response to Amazon, BABA saw its stock rise by more than 35% after posting a record quarterly earnings report and announcing a partnership with Apple to integrate AI into iPhones sold in China.
MACRO
The 61st Munich Security Conference took place ahead of the third anniversary of Russia’s invasion of Ukraine. The conference underscored Europe’s challenges in facing a revisionist Russia and dealing with disunity within the Western alliance. European leaders pledged unwavering support for Ukraine after US vice president JD Vance made a brutal ideological assault against Europe, stating that the crisis for the region was not external actors such as Russia or China, but rather the threat from within. Fast-moving bilateral peace talks between the US and Russia over Ukraine took place in Saudi Arabia and resulted in a proposed ceasefire and critical minerals agreement. The deal collapsed last week following a heated exchange between the Trump administration and President Zelenskyy in the Oval Office, stating he would not sign a deal which did not include future security guarantees.
US monthly CPI for all items rose by 0.5% in January 0.2% higher than the 0.3% forecast suggesting that inflationary pressures were intensifying. The labour market added 143,000 jobs in January, and the unemployment rate decreased slightly to 4% suggesting further pain may be on the horizon for rate-setters come the next fed meeting on March 19th. CME FedWatch currently prices a 9% probability of a 25-basis point cut in March and a 37% probability in May.
The Bank of England opted to reduce its interest rate from 4.75% to 4.5% during its meeting on February 6th, despite a slight uptick in headline inflation from 3.0% to 3.2% in January. Policymakers cited lingering uncertainties in global financial markets and the potential impact on the domestic economy of Prime Minister Keir Starmer’s commitment to increase spending on defence to 2.5% of GDP from April 2027, with a target of 3% during the next parliament. Some committee members expressed concern over continued strength in wage growth, signalling that further rate hikes might be necessary if inflation does not moderate in the coming months. Prime Minister Keir Starmer committed to increase spending on defence to 2.5% of GDP from April 2027 – the greatest increase since the Cold War.
Inflation in Europe decreased to 2.4% in February, down from 2.5% in January. This decline, primarily due to a slowdown in energy price inflation, reinforced expectations for the European Central Bank (ECB) to cut interest rates. The ECB is anticipated to reduce its benchmark rate by a quarter point to 2.5% at its next meeting on March 6th in order to further stimulate growth.
Later in February, Germany held national elections for the Bundestag, resulting in a victory for the conservative party under Friedrich Merz. This political shift is expected to influence Germany’s domestic and foreign policies in the coming years as he freshly weighs in on European approach to defending Ukraine in the absence of US military support.
GOLD
Throughout February, gold prices rose a further 3% from Januarys all-time highs to a peak of $2958/oz on February 24th. Market analysts attributed this increase in part to continuing uncertainty around global trade policies, which sparked renewed interest in safe-haven assets. Although no major new tariffs on precious metals have been formally introduced, there was considerable speculation that several governments – particularly in the EU – might impose targeted duties on selected exports in retaliation for proposed US tariffs on European luxury goods. This talk, even if tentative, contributed to a more risk-averse sentiment among investors, prompting a modest shift towards gold.
Simultaneously, there was a noteworthy shift in gold bullion flows between London and New York, with the latter seeing a slight uptick in inventory levels. Many bullion traders interpreted this movement as a strategic relocation designed to pre-empt the possibility of new trade or transportation restrictions – especially as discussions regarding reciprocal tariffs and financial sector regulations gained momentum. London, long regarded as the world’s leading hub for precious metals trading and vaulting, continues to supply a substantial share of global gold demand. However, with ongoing uncertainties about how regulators might target cross-border financial operations, some institutional investors appeared to favour New York’s vaults as a hedge against potential logistical or policy frictions in the months ahead.
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