A look back at markets in February when US shares fell amid growth concerns and European markets gained

The month in summary:

 

A look back at markets in February when US stocks fell while European shares outperformed. Bond yields fell (meaning prices rose) amid signs of rising risks to growth.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions, and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

 

US

 

US shares fell in February amid some softer economic data and worries over the potential impact of trade tariffs on the US economy. The weakest sectors were consumer discretionary and communication services, while consumer staples led the gains. Another factor weighing on returns was lingering worries over the sustainability of earnings from US mega cap tech stocks, notably those exposed to the artificial intelligence theme.

Economic data raised some concerns over the health of the US consumer. Data from the Bureau of Economic Analysis showed personal consumption expenditure (PCE) fell 0.2% in January. This was the first negative reading in nearly two years and came in the wake of some cautious comments from US retailers about uncertainty ahead.

Some of that uncertainty surrounds trade tariffs, and the fear that tariffs could cause inflation to increase. President Trump threatened to impose 25% tariffs on goods from the EU and said that the planned tariffs on Canadian and Mexican goods would come into force in early March, following a one-month pause.

 

 

Minutes from the January Federal Open Market Committee (FOMC) meeting indicated that policymakers want to see “further progress on inflation” before considering any further rate cuts. The Federal Reserve (Fed) had kept rates on hold at the January meeting.

 

Eurozone

 

Eurozone shares advanced in February. The financials sector led the gains with bank shares generally performing well amid robust corporate earnings and plans for shareholder returns. Other top gaining sectors included communication services. Within industrials, defence stocks moved markedly on expectations that European governments will have to lift military spending. The information technology and healthcare sectors underperformed in the month.

Investors began to anticipate a ceasefire between Russia and Ukraine. Politics was a key focus in the month amid tense meetings between European leaders and the Trump administration. Germany held elections which, as expected, saw Friedrich Merz’s Christian Democrats (CDU) emerging as the largest party. Negotiations to form a governing coalition will now begin. A coalition between the CDU and the Social Democrats (SPD) appears the most likely scenario. Key issues for the incoming government include the need for more defence spending.

 

 

The flash purchasing managers’ index (PMI) showed business activity in the eurozone continued to show marginal expansion. The composite PMI was 50.2 in February, the same level as in January. PMI data is based on surveys of companies in the manufacturing and service sectors. A reading above 50 indicates growth while below 50 indicates contraction.

 

UK

 

UK equities rose in February. The financials, healthcare, and industrials sectors were the top gainers. The consumer discretionary, consumer staples, and basic materials sectors underperformed.

Large cap banks, defence companies and the big pharmaceutical groups led the FTSE 100 higher. Meanwhile, sentiment towards UK small and mid-sized companies continued to deteriorate over the period, weighing on the FTSE 250 and FTSE Small Cap indices.

UK small and mid-sized companies underperformed amid ongoing worries around the domestic economic outlook. This was reflected in the poor performance of a number of consumer-facing sectors such as housebuilders and retailers. News that the UK had narrowly avoided a technical recession at the end of 2024 provided little respite to sentiment.

While government bond markets stabilised, the UK’s fiscal outlook remained a concern. In response to a growing European security threat Prime Minister Keir Starmer announced an unexpected increase in defence spending to 2.5% of GDP by 2027. This pledge, however, added to fears that UK Chancellor Rachel Reeves might need to raise taxes again.

The reprieve from a better-than-expected inflation reading in December proved short lived as the Office for National Statistics revealed that Consumer Price Index inflation in January had risen to 3%, its highest rate in 10 months. The Bank of England cut interest rates by 25 basis points.

The UK was spared US tariffs. This helped sterling strengthen over the period (following a very poor January on fears about the country’s fiscal outlook), as did hopes for improved EU relations.

 

Japan

 

The Japanese equity market declined in February, closing the month with a negative return of -3.8% for the TOPIX Total Return in yen terms. The Nikkei 225 fell by -6.1%, underperforming the TOPIX due to weak performance in large-cap stocks, particularly in the technology and exporter sectors.

Market sentiment continued to be heavily influenced by developments in the US, particularly the uncertainty surrounding trade policies. This lack of visibility has increased market uncertainty, leading investors to adopt a risk-off stance. As a result, Japanese equities – especially AI-related stocks, which had previously performed well, along with exporter stocks – experienced a sell-off.

Additionally, concerns have grown that these uncertainties could hinder US economic activity and lead to an economic slowdown, which contributed to a decline in US government bond yields. On the domestic front, solid economic data, including December-quarter GDP figures, and hawkish comments from some Bank of Japan (BOJ) officials, led to an increase in Japanese government bond yields and a narrowing interest rate gap with the US. Consequently, the Japanese yen appreciated against the dollar, further pressuring exporter stocks.

Meanwhile, Japanese companies reported their December-quarter earnings. Despite headwinds such as rising costs due to domestic inflation and uncertainty in global markets impacting exporters, overall results indicated that Japanese companies managed these challenges well, maintaining a solid earnings trend. Ongoing improvements in corporate governance, including share buybacks and dividend hikes, provided additional support to the Japanese equity market.

 

Emerging markets

 

Emerging markets (EM), as measured by the MSCI EM index, rose in US dollar terms in February. China drove the gains as it continued to benefit from optimism about its AI capabilities following the initial release of DeepSeek’s lower-cost open-source AI model in January. The EM index outperformed the MSCI World index and S&P 500 Index, both of which declined over the month.

Poland was notably strong on the back of optimism about a potential end to the Russia-Ukraine war. The smaller markets of Kuwait, Greece, Chile and the Philippines all posted positive returns. Mexico gained as US tariffs, which were announced on 1 February, were paused until 4 March. The UAE and Qatar were also ahead of the broader index, while South Africa performed broadly in line with it, helped by strong performance from some financial services companies and index heavyweight Naspers, which owns a stake in Chinese internet company Tencent.

Korea posted negative returns with foreign equity outflows contributing to the market’s underperformance. The Bank of Korea cut the policy rate by 25 basis points to 2.75% and downgraded its GDP growth forecast in response to growth concerns. Saudi Arabia lagged the broader index amid weaker energy prices while Taiwan ended the month in negative territory, led lower by poor performance from some tech stocks.

Brazil’s underperformance came against a backdrop of slowing economic growth data, as did India’s. The Reserve Bank of India (RBI) lowered the repo rate for the first time in almost five years in February, to 6.25%. The repo rate is the level at which the central bank lends to commercial banks. The RBI said it was maintaining a neutral stance to provide a supportive backdrop for growth. Thailand and Indonesia posted the biggest losses in the month with growth concerns weighing on these markets.

 

Asia (ex Japan)

 

Asia ex Japan equities achieved a modest gain in February. China, Hong Kong, and the Philippines were the best-performing markets in the MSCI All-Country Asia ex Japan Index. Indonesia, Thailand, and India were the worst-performing markets in the month.

Shares in China were sharply higher after government stimulus measures, such interest rate cuts, support for the country’s troubled property sector, and liquidity injections, helped to stabilise the economy and restore investor confidence. Advances in artificial intelligence (AI) by Chinese companies has also led investors to reevaluate China as a leader in the technology sector with strong growth potential.

Shares in Hong Kong also achieved strong gains in the month, driven by technology and ecommerce stocks. Share prices in Taiwan were weaker in February amid fears over tariffs imposed by Donald Trump on semiconductor exports to the US and concerns over a potential slowdown in AI investments by some of the large US technology companies.

Share prices in India were also weaker in February amid signs of a slowdown in the Indian economy. Stretched valuations of Indian stocks and a weak rupee also weakened investor sentiment towards the country in February.

 

Global bonds

 

February saw an increase in market uncertainty, especially in the US. This was driven by the current US administration’s policy agenda, as well as several key indicators showing signs of weakness in the economy, including a dip in consumer confidence and retail sales.

As investors allocated to less riskier assets, US Treasuries found favour, causing yields to drop (yields move inversely to prices). At month-end, US 10-year Treasuries yielded 4.2% and two-year 3.99%.

On the corporate bond front, market conditions were less favourable. Investors began pricing in more risk, causing corporate bond spreads (the difference in yields between corporate and government bonds) to widen across both investment-grade and high-yield markets. In contrast, European corporate bonds fared better, with investment-grade spreads remaining unchanged, and a tightening of high-yield spreads reflecting the uncertainty around US economic outlook.

Investment grade bonds are the highest quality bonds as determined by a credit rating agency. High yield bonds are more speculative, with a credit rating below investment grade.

US Treasuries outperformed other global government bond markets. European government bond markets saw modest returns with 10-year German Bunds yielding 2.39%, Spanish 10-year government bonds 3.10%, and Italian 10-year government bonds 3.47%.

Events in Europe grabbed attention, including the German elections, where the Christian Democrats (CDU/CSU) led by Friedrich Merz claimed victory. Additionally, ongoing discussions about the war in Ukraine raised questions about defence spending across Europe, and the Trump administration’s aggressive use of tariff threats also increased market uncertainty.

In Asia, both China and Japan saw an increase in bond yields. In Japan, new data revealed that the economy grew at an annualised rate of +2.8% in the fourth quarter, significantly higher than the expected +1.1%. This stronger growth raised concerns about inflation and future interest rates, leading investors to adjust their risk.

In the UK, consumer demand continued to weaken, with rising prices for basic necessities and a softening job market. The Bank of England (BoE) cut interest rates by 25 basis points to 4.5%.

Meanwhile, Australia’s central bank also cut its cash rate target from 4.35% to 4.10%, marking its first rate cut since 2020, as it reported progress in reducing inflation. The Reserve Bank of New Zealand followed suit with a third consecutive 0.5% rate cut, bringing its cash rate to 3.75%.

 

Commodities

 

The S&P GSCI Index declined in February. Livestock and agriculture were the worst performing components of the index, while industrial metals and precious metals gained in the month. In agriculture, the price of cocoa was sharply lower, while price falls for wheat, corn, soybeans, and cotton were more muted. Sugar and coffee prices gained in the month.

Within energy, the price of natural gas was sharply higher. In industrial metals, all sub-components advanced in February, with copper and lead achieving the highest price gains. In precious metals, the price of silver fell, while gold achieved a modest price gain.

 

Digital assets

 

February saw a meaningful retracement from the rally in digital assets that followed the US election in November last year. While some of this may be profit taking, factors such as political tensions, trade concerns, inflation risks and central bank policies are also impacting digital asset markets.

In this context, Bitcoin recorded its largest monthly loss since June 2022, dropping 21%. Ethereum and Solana underperformed and dropped by 35% and 39% respectively.

On the regulatory front the US Securities and Exchange Commission (SEC) reportedly halted or dropped several ongoing lawsuits against several major cryptocurrency entities. These cases had previously centred on allegations of unregistered securities offerings or operating without proper licenses. This marks the official end of regulation through enforcement that was the approach under the previous US administration.

 

 

 

 

please remember that the value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

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Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England.

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security / sector / country.

Schroder Unit Trusts Limited is an authorised corporate director, authorised unit trust manager and an ISA plan manager, and is authorised and regulated by the Financial Conduct Authority.



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