Market Key Points
- The Australian equity market had a challenging month returning -3.8% dragged down by growth and cyclical sectors while defensives did well.
- The S&P 500 Index (USD) also finished the month lower returning -1.3%. The Japanese market (Nikkei 225 Index (JPY)) was one of the weakest markets globally with a return of -6.1%.
- Chinese markets were a bright spot, as was some of the European region.
Australian equities
The ASX 200 Accumulation Index fell 3.8% in February. While it started with promise, hitting another record high at the midway point, the final two weeks of the month saw the market erase the gains made in January. The ‘risk-off’ shift came rapidly, with recently popular trades, like technology, being the big losers.
Losses were broad at a sector level, with seven of the eleven sectors posting negative returns. Gains came from defensive sectors such as Utilities (+3.2%), Communications (+2.6%), and Consumer Staples (+1.5%). Meanwhile, Information Technology (I.T.) (-12.3%), Health Care (-7.7%), Property (-6.4%), and Energy (-5.2%) were the biggest laggards.
The I.T. sector, like many across global markets, felt the effects of the move into Chinese tech stocks. Meanwhile, Wisetech, the largest I.T. company in the ASX 200, was a significant drag, down 25.5% in February. This was largely due to continued governance issues. Defensive sectors performed predictably in the risk-off market. Utilities finished up 3.2%, helped by a strong earnings report from APA Group, which gained 9.8%.
Global Equities
Global equity markets were volatile in February as tariff concerns, inflation surprises and shifting investor sentiment weighed on performance. Developed Markets declined, with the MSCI World Ex-Australia Index (AUD) down 0.36%, while Emerging Markets outperformed, gaining 0.79% (MSCI Emerging Markets Index (AUD)). European equities led global markets, while US and Japanese markets struggled.
US markets declined, with the S&P 500 falling 1.3% amid trade tensions, weaker economic data and persistent inflation concerns. The Federal Reserve held rates steady, signalling caution as inflation remained at 3%. Mega-cap tech stocks, including the Magnificent 7, had their worst month since December 2022 and fell into correction territory as investors reassessed high-growth valuations and AI sector momentum.
European equities delivered the strongest performance globally, with the MSCI Europe ex-UK Index rising 3.7% in February (in local currency terms). Gains were driven by strong earnings reports and optimism around a potential Ukraine ceasefire. The European Central Bank held rates steady, with investors expecting further cuts later in the year. Eurozone inflation fell to 2.4%, alleviating some concerns about persistently high price pressures.
Japanese equities fell sharply, with the Nikkei 225 tumbling 6.05% (in local currency terms), making it the worst-performing major market. US tariff threats, a stronger yen and export weakness weighed on sentiment. The Bank of Japan held rates steady, but speculation of a policy shift added to market uncertainty.
Emerging Markets outperformed, with the MSCI Emerging Markets Index (AUD) gaining 0.79%. The Hang Seng Index surged 13.43%, driven by Chinese tech strength and policy support, while the CSI 300 gained 1.91%. Latin American equities also advanced, particularly in Chile and Colombia, as stable commodity prices fuelled optimism.
Property
The S&P/ASX 200 A-REIT Accumulation Index TR continued to fall in February, finishing the month down 6.4%. The Index is in negative territory YTD, down 2.0%. Global real estate equities remained positive, increasing by 2.5% (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)). Australian infrastructure moderated with a return of -0.7%, slowing its growth after an increase of 16.3% in the prior 12-month period. The index has delivered a return of 0.5% YTD.
February saw an uptick in the M&A trend in Australia across the A-REIT sector. It appears the ongoing stoush between Hotel Property Investments (HPI) and the Charter Hall Retail REIT (CQR) led consortium is in its final stages. HPI has notified the market that CQR have acquired 90.86% of HPI securities. This allows for a compulsory acquisition. Goodman Group (GMG) entered into a trading halt on 19/02, announcing a A$4bn share placement to fund its data centre growth plans.
Following successful completion of the placement (119.4m shares at $33.50), shares resumed trading on 20/02 and promptly fell by 7%. Following Centuria Capital Group’s (CNI) 50% acquisition of ResetData Pty Ltd in August 2024, ResetData has announced a joint venture to establish Australia’s first sovereign, public Artificial Intelligence Factory (AI-F1). This is being constructed in an office asset owned by Centuria Office REIT (COF).
The Australian residential property market experienced an increase of 0.3% Month on Month (as represented by CoreLogic’s five capital city aggregate). Growth was felt in all capitals outside of Darwin. Melbourne was the biggest riser although still remains in negative territory over the previous 12-month period (+0.4%, -3.2% YoY). Perth continued to rise (+0.3%, 14.3% YoY), with the remaining 3 capitals seeing the same growth of 0.3%. Darwin was the only city to see a fall in value (-0.1%).
Fixed Income
The bond market witnessed a surge of investor activity as uncertainty surrounding the US policy stance and growing concerns about potential future economic weakness made headlines.
The Reserve Bank of Australia began its rate cutting cycle by reducing the cash rate by 25 basis points, marking the first rate cut since November 2020. While the market anticipates further rate reductions, there remains a degree of uncertainty, particularly with Governor Bullock cautioning that overly rapid rate cuts could disrupt the current path of disinflation.
Against this backdrop, the Australian 10 year government bond yield fell from 4.43% to 4.29%, a decline of 14 bps. Similarly, the Australian 2 year government bond yield decreased from 3.83% to 3.74%, a drop of 9 bps.
This past month, U.S. President Donald Trump imposed significant tariffs of 25% on key trading partners Canada and Mexico, alongside a 10% tariff on imported Chinese goods. This, coupled with a decline in consumer sentiment, as reflected in the Conference Board’s Consumer Confidence Index, the widening U.S. trade deficit, and a drop in the Personal Consumption Expenditure (PCE), has raised concerns about the potential for stagflation, overshadowing initial expectations of strong economic growth.
As a result, investors flocked to safe haven assets, putting downward pressure on bond yields. The U.S. 10 year Treasury yield fell from 4.54% to 4.21%, a drop of 33 bps. Similarly, the U.S. 2 year Treasury yield decreased from 4.22% to 4.01%, a drop of 21 bps.
Currencies & Commodities
The Australian dollar (AUD) depreciated over the month of February, closing 0.2% lower in trade weighted terms to 59.5, depreciating against the US Dollar (USD), Pound Sterling (GBP), Euro (EUR) and the Japanese Yen (JPY).
The Australian dollar weakened against the USD led by continuing uncertain economic conditions, specifically around tariffs. Additionally, the RBA cut interest rates for the month of February, indicating a potential hawkish outlook.
The depreciation of the AUD was broadly led by uncertainty around China’s economic outlook as well as yield differentials between Australia and other advanced economies.
Relative to the AUD, the JPY was the highest performer of the month, appreciating in relative terms by 3.0% against the AUD. Year-on-year, the AUD remains behind the USD, EUR, GBP and the JPY by 4.4%, 0.5%, 4.1% and 4.0% respectively, in relative terms.
Economic key points
- RBA cut rates by 0.25% to 4.1%, the first rate reduction in four years
- US annual inflation came in at 3% in January, with core inflation at 3.3%.
- The ECB lowered interest rates by 0.25%.'
Australia
The RBA lowered the cash interest rate from 4.35% to 4.10%, as widely expected. Accompanying commentary from governor Michele Bullock ruled out another cut before the federal election and warned that the decision shouldn’t be taken to confirm prevailing market expectations for two more cuts this calendar year.
Ms Bullock noted that the RBA board had gained confidence that inflation was heading in the right direction, but it would need to see further easing in wage growth, services and housing inflation before loosening monetary policy again.
Headline inflation increased 2.5% over the year to January, the same pace as for calendar 2024. The RBA’s preferred trimmed mean inflation rate accelerated slightly to +2.8%. These results are within the bank’s target range of 2-3%, but they include impact from the large energy subsidies which began for households in July last year:
Unemployment rose to 4.1% in January, matching market estimates. Retail sales increased 0.3% in January, matching market forecasts. Annual sales increased 3.8% in January, down from the 4.6% increase in December.
The Westpac Consumer Confidence Index came in at 92.2 in February with firming rate cut expectations supporting the positive outlook. However, the unsettled global backdrop has restrained expectations for the economy.
The NAB Business Confidence fell to -1 in February, a significant decrease from the forecasted +6 and previous months result of +5. Composite PMI fell to 50.6 in February, indicating a slowdown in the rate expansion in business activity. Growth was primarily driven by services activity, while new business increased in both sectors.
The trade surplus increased to $5.62bn in January, slightly above market estimates of $5.5 bn.
While US tariffs have so far targeted Canada, China and Mexico, Australia is bracing for the introduction of tariffs on steel and aluminium imports.
US
The headline CPI rose 0.5% in January, representing a +3.0% gain over the last 12 months. One driver of the change was likely that many businesses raised prices for the start of the year. Food was a major contributor to the overall price gains, but even core inflation, which excludes food and energy, also accelerated to a +3.3% annual rate.
Non-farm payroll added 151,000 jobs in February, below forecasts of 160,000. The unemployment rate rose to 4.1% in February, just above the market expectation of 4.0%.
Consumer sentiment was revised sharply to 64.7% in February, from the preliminary 67.8, and is the lowest level in over a year. The decrease in sentiment was unanimous across groups by age, income, and wealth as inflation expectations rose and increased Composite PMI came in at 51.6 in February, down from January’s 52.7. This marked the slowest pace of expansion in the US private sector since April 2024, with service sector growth slowing to a 15-month low. In contrast, manufacturing output saw a significant increase.
The trade deficit widened to a record $131.4 bn in January, above the forecast $127.4 bn deficit, as imports increased by 10% in anticipation of upcoming tariffs.
President Trump shocked global markets in February by announcing that he would implement tariffs on all imports from Canada and Mexico, and an incremental 10% levy on goods from China. While these tariffs were delayed for 30 days, relationship between the US and its trading partners remains strained.
Eurozone
The ECB lowered the three key interest rates by 25bps, as expected, reducing the deposit facility rate to 2.50%, the main refinancing rate to 2.65%, and the marginal lending rate to 2.90%.
Annual inflation eased to 2.4% in February, above the market expectation of 2.3%.
Retail sales dropped 0.3% in January, while annual sales missed expectations of +1.9%, coming in at 1.5%. Consumer confidence rose 0.6 points to -13.6 in February as consumers became less pessimistic about the economy.
The unemployment came in at 6.2% in January, below the anticipated 6.3%.
The Composite PMI was steady at 50.2 in February, indicating marginal growth. Spain led the expansion with a strong and accelerating rise in business activity, while Ireland also saw faster growth, and Italy returned to expansion for the first time in four months.
In contrast, Germany experienced only modest growth, and France’s activity continued to decline
UK
Preliminary estimates show the UK economy grew by 1.4% year-on-year in the fourth quarter of 2024, accelerating from an upwardly revised 1.0% expansion in the previous quarter and surpassing market expectations of 1.1%. The fastest growth in two years, demand was driven by household consumption and a rise in government spending.
The unemployment rate was steady at 4.4% for the three months to December, below market expectations of 4.5%.
Consumer confidence increased by two points to -20 in February as consumers benefited from lower borrowing costs. Retail sales increased 1% in January, above the expected 0.6%, largely driven by an increase in sales in food stores.
Composite PMI dipped slightly to 50.5 in February with the expansion in services activity offsetting a sharp decline in manufacturing output.
Prime Minister Keir Starmer has pledged increase aid to Ukraine to £12.8 bn to help offset the cutting of aid from USA.
China
Consumer prices dropped 0.7% for the year to February, above the expected -0.5% amid fading seasonal demand following the Spring Festival in late January.
Composite PMI increased to 51.5 in February 2025 from 51.1 in the previous month, marking the highest reading since last November. It was the 16th straight month of growth in private sector activity, with manufacturing expanding the most in three months and the service economy rising more than estimated.
The unemployment rate rose to 5.1% in December, just above the expected 5%.
China's trade surplus surged to USD 170.52 billion in January-February, exceeding market expectations of USD 142.4 billion. The sharp increase was driven by an unexpected 8.4% year-on-year tumble in imports, the steepest decline since July 2023, amid weakening domestic demand at the start of the year.
Japan
Economic growth in Japan accelerated to +2.8% on an annualised basis in the December quarter, well above the +1.0% forecast by economists. Capital expenditure by businesses was up, but a marginal increase in personal consumption was a key driver of the overall positive surprise. Historically high inflation rates and a weak yen have put pressure on Japanese household spending, but wage increases from 2024 are beginning to rebuild purchasing power and improve confidence.
These conditions provide further support for the Bank of Japan to continue hiking interest rates from the current 0.50%, possibly as soon as March.
Annual inflation rate climbed to 4.0% in January as food prices continued to rise sharply. Core inflation rose 3.2%, ahead of market expectations of 3.1%.
Retail sales fell rose by 3.9% in January, above the revised December rate of 3.5%, with wage growth supporting increased consumption. Consumer confidence unexpectedly declined to 35 in February, below market expectations of 35.7.
Composite PMI increased 52.0 in January, with services activity increasing at the strongest pace in six months.
This article contains information first published by Lonsec. Voted Australia’s #1 Research House for 2019.
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