2025-05-08

1st quarter 2025 market overview

Equity market

In recent years, US equities have significantly outperformed the rest of the world in terms of returns, and with the rise of the Republicans and the “America First” slogan, this trend was expected to continue or even increase.

However, the reality now appears to be different. Uncertainty about US foreign trade policy and the level and application of import tariffs, as well as frequent changes in rhetoric, have significantly increased investors’ sense of uncertainty. At the same time, volatility has increased and the perception that the US may experience a mild economic downturn, if not a recession, has strengthened.

Looking ahead, it is important to stress that larger and smaller corrections in the markets happen every year.

They help markets to self-correct, shifting investment from less efficient to more efficient areas. Corrections also prevent the formation of larger price bubbles. The current market correction is no different from previous ones, and at the end of the first quarter, equity indices were at the same level as in November last year. Historical data point to long-term positive returns for equity markets, and a period of corrections can be favourable to increase investment and overall future returns.

Bond market

The European Central Bank continued its steady rate-cutting cycle and cut interest rates 2 more times in the first quarter of the year (from 3% to 2.5%), but this did not have a significant impact on sovereign bond yields, as the cuts were already priced in.

Germany approved a record €500 billion increase in its defense budget, and the parliament amended the constitution to relax the debt limits that allow increased military spending.

Other European countries also announced higher defense budget plans, while increased government spending pushed up bond yields on the back of expected increases in government debt.

The credit premium on corporate bonds has continued to retreat and is close to its lowest point in the last 4 years, indicating that investors view European companies as relatively safe. Meanwhile, subdued inflation and slower economic growth in the US have led to an appreciation of dollar-denominated bonds, which had previously been cheaper at the end of 2024.

Commodities market

Increased volatility in the prices of stocks, bonds and other financial assets, and falling cryptocurrency prices has forced investors to turn to a long-forgotten safe haven asset – gold. Since the beginning of the year, the price of gold has repeatedly broken all-time records and in mid-March crossed the psychologically and historically important level of USD 3 000 per troy ounce. However, the momentum did not stop there, and by the end of the quarter the price of the yellow metal exceeded USD 3 100 per troy ounce. Overall, the return on the gold price during the quarter was 19% in US dollars and 13.9% in euro terms.