Elite Research | 29.03.2025

GBP Fundamental Economic Breakdown

Monetary Policy & Bank of England (BoE) Outlook

• The Bank of England is widely expected to begin its rate cutting cycle in the second half of 2025, but market pricing remains volatile.
• The BoE’s policy stance is complicated by conflicting domestic signals. While inflation has been trending lower, wage growth and services inflation remain elevated, prompting the Monetary Policy Committee (MPC) to adopt a cautious approach.
• Markets are currently pricing around 80-85bps of rate cuts for 2025, with the first cut anticipated around August, though this timeline could be delayed depending on labor market and inflation data.
• Recent commentary from MPC members has revealed divisions, with some policymakers favouring earlier cuts, while others remain concerned about residual price pressures and underlying wage dynamics.

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Fiscal Policy & UK Budget Position

• Chancellor Rachel Reeves’ 2025 Spring Statement was relatively well received, with the UK Office for Budget Responsibility (OBR) providing a positive assessment of the government’s planning reforms and long-term growth trajectory.
• Importantly, the UK government managed to contain its gilt issuance remit below £300 billion, providing some support to UK sovereign debt and alleviating market concerns over excessive fiscal loosening.
• However, the Chancellor’s fiscal strategy implies that tough decisions on taxation and spending will likely be required in the autumn, adding an element of fiscal uncertainty later in the year.

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Growth Outlook & Domestic Fundamentals

• The UK economy has avoided recession but remains in a fragile, low-growth environment. Domestic demand is constrained by tight monetary policy, elevated mortgage costs, and weak consumer confidence.
• Recent downside surprises in UK inflation data have raised market expectations of earlier BoE rate cuts, though the persistence of services inflation and a still-tight labor market are limiting the BoE’s flexibility.
• Structural economic challenges—including weak productivity growth, Brexit-related trade frictions, and elevated public debt—continue to weigh on the UK’s medium-term growth prospects.

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External Factors & Trade Sensitivity

• The UK economy is relatively insulated from global trade tensions compared to the eurozone but remains exposed to broader risk sentiment and USD dynamics.
• The recent US announcement of 25% auto tariffs and the possibility of EU retaliation has had a limited direct impact on the UK, but broader financial market volatility could indirectly affect GBP through global risk channels.
• GBP’s correlation to global equity and risk sentiment remains notable, with safe-haven flows and USD strength often acting as headwinds.

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Inflation & Labor Market Dynamics

• UK inflation has decelerated significantly but remains above target, particularly in core services components.
• Wage growth, while easing from peak levels, is still elevated by historical standards, contributing to the BoE’s cautious approach.
• The labor market is gradually loosening, with slowing job growth and declining vacancy rates, but policymakers remain concerned about the persistence of domestic inflation pressures.

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Summary‍

The British Pound’s fundamental outlook is shaped by a BoE that is preparing to begin a gradual easing cycle but is constrained by sticky services inflation and wage growth. Fiscal conditions have improved marginally following a prudent Spring Statement, but the risk of future fiscal tightening looms. The UK’s low-growth, high-debt economic profile and sensitivity to global risk sentiment add to the complex macro backdrop. Domestic inflation dynamics, labor market data, and the timing of BoE rate cuts will remain the key market drivers for GBP fundamentals.

JPY Fundamental Economic Breakdown

Monetary Policy & Bank of Japan (BoJ) Outlook

• The Bank of Japan (BoJ) ended its negative interest rate policy and yield curve control framework in March 2025, marking a historic policy shift after years of ultra-loose monetary conditions.
• The BoJ raised its policy rate to 0.10% and signalled the start of a gradual normalization process, although it emphasized that further tightening would be slow and data-dependent.
• The central bank remains cautious about tightening aggressively, given subdued domestic demand, fragile consumption, and concerns about sustainability of wage growth.
• The market currently prices in approximately one additional BoJ rate hike by July 2025, but the BoJ has stressed that policy will remain accommodative, and any future hikes will be gradual and limited.

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Inflation & Wage Dynamics

• Japan's inflation has moderated but remains above the BoJ’s 2% target. Tokyo CPI data for March is expected to show a deceleration in headline inflation to 2.7% YoY.
• More importantly, core and core-core inflation measures remain around 2.2% and 1.9% YoY, respectively.
• Wage growth has accelerated significantly following the strong results from the 2025 Spring Wage Negotiations (Shunto), leading the BoJ to upgrade its wage growth outlook. However, policymakers continue to monitor whether wage increases will sustainably support inflation above target.

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Growth Outlook & Domestic Fundamentals

• Japan’s economic growth remains modest, with domestic consumption still fragile despite improving wage dynamics.
• Capital expenditure has been supported by corporate profitability and increased domestic investment, but external demand remains weak, particularly from China and the broader Asia region.
• The Japanese economy remains exposed to cyclical and structural headwinds, including an ageing population, low productivity growth, and high sensitivity to global demand.

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External Factors & Global Risks

• The Japanese yen is heavily influenced by global risk sentiment and external financial conditions, primarily through its role as a funding currency in global carry trades.
• The recent imposition of 25% US auto tariffs has negative implications for Japan’s export sector. Japan is particularly vulnerable because its auto exports contain very little US content, meaning they are less likely to qualify for exemptions.
• Japanese automakers have already begun shifting production to the US to avoid tariffs, increasing production costs and dampening Japan’s GDP outlook.
• Global equity market performance, US-Japan rate differentials, and geopolitical tensions remain key external drivers of JPY valuation.

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Balance of Payments & Safe Haven Status

• Japan maintains a large current account surplus, which structurally supports the JPY.
• The yen’s safe-haven status continues to attract inflows during periods of global financial stress or equity market weakness.
• However, BoJ’s policy normalization reduces the negative carry associated with holding JPY, which could structurally improve yen demand over the medium term.

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Summary‍

The Japanese yen’s macroeconomic outlook is undergoing a structural shift following the BoJ’s exit from negative rates and yield curve control. While inflation and wage growth are now supportive of gradual policy normalization, the BoJ remains extremely cautious given fragile domestic demand and external risks. Global risk sentiment, US-Japan rate differentials, and the impact of US trade policy—particularly auto tariffs—remain key external drivers of JPY fundamentals. The yen’s safe-haven characteristics and large current account surplus provide an underlying bid, but structural challenges in domestic growth persist.

NZD Fundamental Economic Breakdown

Monetary Policy & Reserve Bank of New Zealand (RBNZ) Outlook

• The Reserve Bank of New Zealand (RBNZ) has maintained an overtly hawkish stance relative to other developed market central banks.
• The RBNZ has kept the Official Cash Rate (OCR) at 5.50%, the highest in the G10 space, with no immediate intention to cut rates.
• Policymakers continue to emphasize that domestic inflation pressures remain too high and that the labor market is still tight.
• The RBNZ’s February Monetary Policy Statement explicitly noted that inflation expectations remain above target and that monetary policy needs to remain restrictive for some time to ensure inflation returns to the 1-3% target band.

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Inflation & Domestic Economic Conditions

• While headline inflation has moderated, non-tradable (domestic) inflation remains elevated, reflecting persistent cost pressures in services, housing, and wages.
• The RBNZ remains concerned about upside risks to inflation, particularly from fiscal stimulus and resilient household demand.
• New Zealand’s labor market conditions, although showing early signs of loosening, are still relatively tight, with low unemployment and wage growth remaining elevated.

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Fiscal Policy & Growth Outlook

• The New Zealand economy has shown signs of slowing under the weight of restrictive monetary policy, with weak business confidence, falling house prices, and slowing credit growth.
• However, fiscal policy is supportive in the short term, with the government maintaining elevated spending levels to support infrastructure, healthcare, and disaster recovery (notably following cyclone-related disruptions in 2023).
• Growth momentum is expected to remain weak throughout 2025, with the RBNZ deliberately engineering a slowdown to bring inflation under control.

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External Factors & Trade Sensitivity

• New Zealand’s economy is heavily exposed to global trade and commodity cycles, particularly through its agricultural export base (dairy, meat, and forestry).
• Any slowdown in Chinese demand or global trade volumes poses direct downside risks to New Zealand’s export earnings and terms of trade.
• The recent escalation of US auto tariffs and broader trade tensions increase the risk of a global economic slowdown, which could negatively impact New Zealand’s export-dependent economy.

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Terms of Trade & External Balances

• New Zealand’s current account deficit remains a structural vulnerability, though it has improved from prior levels as import demand has weakened and commodity prices have remained stable.
• The NZD remains sensitive to swings in global risk sentiment and commodity prices, given the economy’s heavy reliance on external financing and export revenue.

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Summary‍

The New Zealand Dollar is fundamentally supported by a highly restrictive RBNZ policy stance, which contrasts with the easing bias of most other G10 central banks. However, domestic growth is slowing, inflation remains elevated, and the RBNZ’s tight policy is designed to cool the economy further. External vulnerabilities, including exposure to global trade cycles, China’s demand outlook, and rising global trade tensions, pose clear downside risks to the NZD. The combination of a structurally weak current account, tight monetary policy, and external cyclical risks will continue to drive NZD fundamentals through 2025.

USD Fundamental Economic Breakdown

Monetary Policy & Federal Reserve Outlook

• The Federal Reserve has firmly transitioned into a data-dependent, wait-and-see mode following its last rate hike in 2024. Policy rates remain restrictive, with the Federal Funds Rate at 5.50%, and market participants are focused on the timing and extent of potential rate cuts in 2025.
• US inflation has moderated but remains sticky. Core PCE inflation is expected to tick back up to 2.7% YoY from 2.6% YoY in Q4 2024, reinforcing the Fed’s cautious stance.
• Labor market data remains resilient, with unemployment low and job creation strong, though wage growth has cooled.
• Market pricing currently anticipates around 75bps of Fed rate cuts in 2025, but the Fed continues to push back against aggressive easing expectations, emphasizing that inflation is still above target.
• Several Fed officials, including Chair Powell, have highlighted the risk of cutting too soon and have signalled that policy will remain restrictive until inflation returns sustainably to target.

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Growth Outlook & Domestic Fundamentals

• The US economy continues to outperform peers, with Q4 2024 GDP growth revised up to 2.5% QoQ annualized, driven by strong personal consumption and business investment.
• Domestic demand remains robust, underpinned by a strong labor market, real wage gains, and resilient corporate profitability.
• The services sector remains particularly strong, while manufacturing activity has stabilized.
• Financial conditions have loosened moderately despite restrictive Fed policy, supported by equity market strength and easing credit spreads.

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Fiscal Policy & Debt Dynamics

• The US fiscal position remains expansionary, with large deficits and rising public debt levels.
• Treasury issuance remains elevated, and the fiscal impulse continues to provide support to domestic demand.
• However, persistent large deficits and the growing cost of debt servicing are increasingly viewed as medium-term structural vulnerabilities, with potential implications for longer-term USD fundamentals.

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External Factors & Global Reserve Status

• The US Dollar remains structurally supported by its global reserve currency status and safe-haven appeal.
• Recent geopolitical developments, including the announcement of 25% US auto tariffs, have heightened global trade tensions. While these tariffs pose risks to global growth, the USD has benefitted from safe-haven flows and global risk aversion.
• However, there is growing concern among market participants about the longer-term erosion of global confidence in the USD, particularly amid rising US debt levels and potential geopolitical fragmentation of trade and reserve currency preferences.

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Trade Policy & Global Risks

• The US Administration’s decision to impose sweeping tariffs on imported autos and auto parts (worth an estimated $500bn) has increased global trade tensions.
• President Trump has indicated the possibility of leniency on reciprocal tariffs next week, but the risk of a broader trade war remains elevated.
• Trade tensions, if prolonged, could weigh on global growth and risk sentiment, indirectly supporting the USD through safe-haven demand but increasing downside risks to the global economy.

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Summary‍

The US Dollar remains fundamentally supported by high nominal yields, strong economic growth, and safe-haven demand amid geopolitical and trade tensions. The Fed’s restrictive monetary policy stance, combined with resilient domestic fundamentals, continues to anchor USD strength. However, structural fiscal vulnerabilities, sticky inflation, and rising trade protectionism present medium-term risks to USD valuation. The balance of risks for the USD will be driven by the Fed’s policy trajectory, inflation dynamics, fiscal sustainability, and the evolution of global risk sentiment.

Emerging & Exotic Markets Economic Breakdown

Mexico (MXN)

Monetary Policy & Banxico Outlook

• Banxico cut its policy rate by 25bps to 11.00% in March 2025, marking the start of its easing cycle after maintaining rates at elevated levels since early 2023.
• The rate cut reflects clear signs of domestic disinflation and a slowing economy. Headline inflation has moderated towards target, with core inflation easing meaningfully.
• Despite initiating the easing cycle, Banxico remains cautious and data-dependent. Its forward guidance is designed to prevent destabilizing capital outflows or excessive peso depreciation.
• A further 50bps rate cut to 9.00% is expected by markets over the next few months, but Banxico’s easing pace will be determined by US monetary policy, MXN volatility, and domestic inflation.

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Macro Fundamentals

• Mexico’s external position is robust, supported by strong remittances, foreign direct investment, and a stable current account.
• However, fiscal slippage risk is growing ahead of the 2025 Presidential elections, with increasing government spending and weaker revenue collection.
• The announcement of US auto tariffs poses a direct risk to Mexico’s export sector, particularly its large auto manufacturing base.

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China (CNY)

Monetary & Fiscal Policy

• Chinese authorities continue to pursue an accommodative policy stance to support growth amid weak domestic demand and a fragile property sector.
• The People’s Bank of China (PBoC) has maintained low policy rates and ample liquidity conditions.
• Fiscal policy is focused on targeted infrastructure spending and support for the housing sector.

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Growth Outlook

• China’s growth recovery remains shallow, weighed by structural headwinds in real estate, local government debt, and subdued consumer confidence.
• Export growth faces challenges from weak global demand and rising trade protectionism.

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External Risks

• The imposition of US auto tariffs and potential escalation of global trade tensions could further dampen China’s trade and manufacturing outlook.

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Brazil (BRL)

Monetary Policy

• The Central Bank of Brazil (BCB) is well advanced in its easing cycle, having delivered cumulative rate cuts since mid-2023.
• With inflation pressures moderating and growth slowing, further rate cuts are expected, though the pace may slow in H2 2025 depending on fiscal developments.

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Fiscal Policy & Risks

• Brazil’s fiscal trajectory remains a concern, with persistent large deficits and weak political commitment to structural fiscal reforms.
• Fiscal risks are being reassessed by markets amid rising global rates and local political uncertainty.

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External Drivers

• Commodity prices remain a key driver of BRL fundamentals, particularly soybeans, iron ore, and crude oil.
• Global risk sentiment and US rate policy remain critical external factors.

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South Africa (ZAR)

Monetary Policy

• The South African Reserve Bank (SARB) has kept policy rates elevated to anchor inflation expectations amid persistent price pressures and structural economic fragilities.
• Disinflation has been slow, particularly in core goods and services.

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Structural Challenges

• Growth is constrained by chronic infrastructure bottlenecks, power supply disruptions (load-shedding), and high unemployment.
• Fiscal risks remain material, with deteriorating debt dynamics and pressure for increased social spending ahead of elections.

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Eastern Europe (PLN, HUF, CZK)

Monetary Policy

• Central banks in Eastern Europe (NBP, MNB, CNB) have begun cutting rates cautiously amid easing inflation.
• Rate cuts are measured and conditional on exchange rate stability and alignment with ECB easing expectations.

Macro Risks

• External vulnerabilities stem from the region’s dependence on eurozone demand, energy imports, and fiscal loosening.
• Escalating US-EU trade tensions could weigh on regional exports and investor sentiment.

Turkey (TRY)

Monetary Policy

• The Central Bank of Turkey (CBRT) has engaged in a belated tightening cycle, lifting rates sharply in 2024-25 to combat entrenched inflation.
• Real interest rates remain deeply negative, and inflation expectations remain unanchored.

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Structural Risks

• Turkey’s economy faces persistent balance of payments pressures, low FX reserves, high external debt, and chronic inflation.
• Policy credibility remains low despite recent rate hikes, and capital account risks are elevated.

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Other Asian EM Currencies (KRW, TWD, INR, IDR)

External & Policy Drivers

• These currencies remain primarily driven by:
  • US monetary policy and rate differentials.
  • Trade exposure to China and global tech cycle.
  • Risk sentiment around regional geopolitical tensions (China-US, Taiwan).
  • Relatively resilient domestic fundamentals in India and Indonesia compared to North Asia.
• Trade war escalation, particularly around auto tariffs and retaliatory measures, poses downside risks to export-driven Asian economies.

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Summary

Emerging and exotic market currencies face a challenging macro backdrop shaped by global trade tensions, a cautious Fed, and idiosyncratic domestic vulnerabilities. Most EM central banks have shifted toward or are preparing for easing cycles, balancing disinflation progress with external risks. Fiscal deterioration and election-related spending are emerging themes in Latin America and EMEA. In Asia, export dependency and exposure to US-China trade frictions are the dominant drivers.

NASDAQ Economic Breakdown

Monetary Policy & Interest Rates

• The NASDAQ Composite Index is structurally sensitive to changes in US monetary policy, given its heavy concentration in technology and growth stocks.
• The Federal Reserve’s ongoing policy stance of restrictive rates at 5.50%, combined with expectations for approximately 75bps of rate cuts in late 2025, remains the primary macro driver.
• High real interest rates and US Dollar strength have continued to cap upside in high-duration growth stocks, which are more vulnerable to discount rate adjustments.

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Earnings & Sector Composition

• The NASDAQ’s earnings profile is heavily tilted toward:
  • Large-cap tech (Apple, Microsoft, Nvidia, etc.)
  • Communications and consumer discretionary sectors
• Corporate earnings growth in these sectors has remained strong, supported by:
  • Resilient US consumer demand.
  • Continued digital transformation.
  • Growing demand in AI, cloud computing, and semiconductor sectors.
• However, valuations in the NASDAQ are historically high, with elevated price-to-earnings multiples, leaving the index exposed to interest rate volatility and growth downgrades.

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Fiscal Policy & Tech Sector Exposure

• The US government’s sustained fiscal stimulus has indirectly supported the technology sector by underpinning domestic consumption and investment.
• However, fiscal sustainability concerns and rising Treasury issuance are weighing on long-term US rates, indirectly affecting tech sector valuations.

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Geopolitical & Trade Policy Risks

• The technology sector is particularly exposed to US-China trade tensions and export controls on semiconductors and advanced technology.
• The recent escalation of US auto tariffs has increased the risk of broader trade retaliation, which could negatively impact supply chains, production costs, and global demand for US tech products.
• Geopolitical fragmentation poses medium-term risks to global demand and capital expenditure in the technology space.

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Liquidity & Financial Market Conditions

• Despite the Fed’s restrictive policy, financial conditions have remained relatively loose in equity markets, supported by risk appetite, retail investor inflows, and stable corporate credit markets.
• However, market sentiment toward NASDAQ remains highly sensitive to any adjustment in Fed policy expectations, inflation data, or macroeconomic downside surprises.

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Structural Growth Themes

• Longer-term structural drivers of NASDAQ performance remain intact, including:
  • Artificial Intelligence (AI) investment cycle
  • Digital infrastructure expansion
  • Cloud computing adoption
  • Green technology initiatives
• These secular trends provide a supportive backdrop but do not insulate the index from cyclical macro risks.

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Summary

‍The NASDAQ’s macroeconomic backdrop is characterized by strong earnings growth, structural tech sector tailwinds, and high sensitivity to US interest rates and monetary policy. Elevated valuations, high real yields, and escalating global trade tensions pose near-term headwinds. The trajectory of US inflation, Federal Reserve rate cuts, and global trade policy will remain the key drivers of NASDAQ fundamentals in 2025.

Dow Jones Economic Breakdown

Monetary Policy & Interest Rates

• The Dow Jones Industrial Average (DJIA), composed of 30 large-cap US blue-chip companies, is fundamentally sensitive to the trajectory of US monetary policy.
• The Federal Reserve’s decision to maintain policy rates at 5.50%, combined with market expectations of approximately 75bps of cuts in late 2025, continues to influence DJIA performance.
• Elevated US real yields and tight financial conditions have acted as a headwind for index performance, particularly in interest rate-sensitive sectors like Industrials and Financials.

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Earnings & Sector Composition

• The DJIA is more cyclical and value-oriented compared to the S&P 500 and NASDAQ, with heavy sector weightings in:
  • Industrials
  • Financials
  • Energy
  • Consumer Staples
• Earnings in these sectors have remained resilient, supported by strong US domestic demand and corporate profitability.
• Margin pressures from higher input costs and wage inflation have started to ease, though the potential for a slowdown in corporate investment and consumer demand remains a key risk.

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Fiscal Policy & Domestic Demand

• US fiscal policy remains broadly supportive of domestic economic activity, with elevated public spending and infrastructure investment benefiting many DJIA constituents in the industrial and construction sectors.
• However, concerns over US fiscal sustainability, rising Treasury issuance, and growing debt servicing costs pose medium-term risks to business confidence and financial market conditions.

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Trade Policy & Geopolitical Risks

• The announcement of 25% US auto tariffs and the risk of escalating trade wars have a direct impact on Dow Jones components with global manufacturing and export exposure.
• Industrials and multinational corporates in the DJIA are particularly vulnerable to trade tensions, higher input costs, and potential retaliatory tariffs.
• Global growth risks stemming from trade protectionism pose downside risks to revenue growth and capital expenditure plans.

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Macroeconomic Growth Outlook

• The US economy continues to outperform global peers, with strong GDP growth and resilient labor markets.
• However, leading indicators suggest slowing growth momentum into 2025 as restrictive monetary policy and trade frictions begin to weigh on business activity and consumer confidence.

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Liquidity & Risk Sentiment

• Financial conditions remain tight but have improved slightly as markets price in Fed rate cuts later in 2025.
• The DJIA’s cyclical and value tilt makes it more sensitive to macroeconomic developments and policy uncertainty than growth-oriented indices like the NASDAQ.

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Summary

‍The Dow Jones' macro backdrop is supported by strong US economic fundamentals and fiscal support but is increasingly constrained by tight monetary policy, high real yields, and growing trade protectionism. The index’s cyclical and industrial exposure makes it more sensitive to US and global growth trends, trade policy risks, and corporate investment decisions. The path of Federal Reserve easing, trade tensions, and US fiscal dynamics will remain the primary market drivers for the DJIA in 2025.

DAX 40 Economic Breakdown

Macroeconomic Growth & Domestic Fundamentals

• The German economy, and by extension the DAX 40, has been experiencing a period of stagnation, with weak growth momentum throughout 2024 and early 2025.
• Recent data, including the German IFO survey, suggests tentative signs of a cyclical upturn, but the recovery remains fragile and uneven.
• Structural headwinds persist:
  • High energy costs following the loss of cheap Russian gas.
  • Weak productivity growth.
  • Supply chain adjustments post-pandemic.
  • Lingering uncertainty around Germany's fiscal policy and industrial strategy.

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Monetary Policy & ECB Outlook

• The European Central Bank (ECB) is expected to begin its rate cutting cycle in June 2025, with approximately 85bps of cumulative cuts priced in by year-end.
• Easing monetary policy will support financing conditions and corporate earnings but reflects a broader acknowledgment of soft eurozone economic activity.
• The DAX is particularly sensitive to ECB policy, given Germany’s heavy industrial base and exposure to global demand.

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Trade Policy & Geopolitical Risks

• The US announcement of 25% auto tariffs poses a direct and material risk to the DAX 40, given the index's significant exposure to the German automotive sector (Volkswagen, BMW, Mercedes-Benz).
• German auto exports are a key pillar of the DAX 40’s earnings base, and escalating trade tensions with the US could weigh heavily on corporate profits.
• Broader global trade war risks, particularly between the US, EU, and China, represent a significant downside risk to German industrial exporters.

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Energy & Structural Factors

• Elevated European energy costs, though lower than their 2022–2023 peak, continue to challenge German industrial competitiveness.
• The DAX is exposed to long-term structural shifts, including:
  • Germany’s green energy transition and the impact on heavy industry.
  • Decarbonization costs and the need to modernize industrial infrastructure.
  • Potential regulatory risks from EU climate policy.

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Corporate Earnings & Sector Composition

• The DAX 40 is dominated by cyclical sectors such as Industrials, Automotives, Chemicals, and Financials, making it sensitive to global growth trends.
• Earnings growth is expected to remain soft in the near term, constrained by weak domestic demand, soft global trade, and margin pressures from elevated costs.
• The anticipated ECB easing cycle may improve credit conditions and support earnings later in the year.

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Valuation & External Factors

• DAX valuations remain moderate relative to global peers but are vulnerable to:
  • US interest rate policy and global risk sentiment.
  • Euro strength or weakness, given the DAX’s large export exposure.
  • Global equity market volatility and geopolitical shocks.

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Summary

‍The DAX 40’s macroeconomic backdrop is defined by sluggish German economic growth, high exposure to global trade cycles, and structural industrial challenges. The ECB’s imminent rate cutting cycle will provide support, but trade tensions—particularly US auto tariffs—and energy cost pressures remain key downside risks. The index’s cyclical composition and sensitivity to global manufacturing conditions leave it highly exposed to shifts in macroeconomic and geopolitical sentiment.

FTSE 100 Economic Breakdown

Macroeconomic Growth & Domestic Fundamentals

• The FTSE 100’s performance is relatively insulated from the UK domestic economy due to its heavy weighting toward multinational corporations and global revenues.
• The UK economy itself remains in a low-growth environment, facing structural challenges from:
  • Weak productivity growth.
  • Brexit-related trade frictions.
  • Fiscal tightening risks in H2 2025, as signalled in the recent UK Spring Statement.

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Monetary Policy & Bank of England (BoE) Outlook

• The BoE is expected to begin cutting rates in H2 2025, with approximately 80-85bps of easing priced in.
• UK disinflation progress has improved, but persistent services inflation and elevated wage growth continue to weigh on the BoE’s decision-making.
• Rate cuts will help ease financial conditions but are unlikely to materially drive FTSE 100 performance given the index's global earnings exposure.

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Sector Composition & Earnings Profile

• The FTSE 100 is heavily weighted toward:
  • Energy (Oil & Gas)
  • Materials (Mining, Commodities)
  • Financials (Banks, Insurers)
  • Consumer Staples and Healthcare
• This sector composition provides a value tilt and strong exposure to global commodity cycles.
• The index benefits from high dividend yields and exposure to defensive sectors, making it relatively resilient during periods of macro uncertainty.

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Trade & Global Demand Sensitivity

• The FTSE 100’s multinational components derive a large share of revenues from overseas markets, making it highly sensitive to global growth trends, commodity prices, and USD strength.
• Recent US auto tariffs and escalating trade tensions have limited direct impact on FTSE 100 constituents but contribute to broader risk sentiment and volatility in global equities.
• China’s growth outlook and commodity demand remain key drivers for the FTSE’s mining and energy sectors.

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Currency Dynamics

• The FTSE 100 typically benefits from GBP weakness, as a weaker pound inflates the value of overseas earnings.
• BoE rate cuts and weaker UK economic fundamentals may provide FX tailwinds to the FTSE, even as domestic growth slows.

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Valuation & Risk Factors

• FTSE 100 valuations remain cheap relative to global peers, reflecting structural underperformance, political risk premium, and sector composition.
• Key macro risks include:
  • Slower global growth.
  • Commodity price declines.
  • US fiscal and trade policy spillovers.
  • UK fiscal tightening and domestic policy uncertainty.

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Summary

‍The FTSE 100’s macroeconomic backdrop is driven by external factors rather than UK domestic fundamentals. Its heavy exposure to global commodities, defensive sectors, and multinationals positions it well in an environment of global growth divergence and elevated geopolitical risks. UK monetary policy easing, fiscal uncertainty, and GBP weakness are relevant but secondary drivers. Global demand conditions, commodity cycles, and financial market risk appetite will remain the key macro factors influencing FTSE 100 performance in 2025.

Nikkei 225 Economic Breakdown

Monetary Policy & Bank of Japan (BoJ) Outlook

• The Bank of Japan (BoJ) officially ended its negative interest rate policy (NIRP) and yield curve control (YCC) framework in March 2025, marking a structural shift in Japanese monetary policy.
• Policy rates have been lifted to 0.10%, with the BoJ signalling a slow and gradual normalization process.
• Despite the start of policy normalization, the BoJ remains dovish relative to global peers, maintaining ample liquidity and emphasizing accommodative conditions.
• The policy shift is driven by improved wage growth and sustained inflation above target, but the BoJ remains cautious due to fragile consumption and external risks.

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Growth Outlook & Domestic Fundamentals

• Japan’s economic growth remains modest, supported by:
  • Strong corporate balance sheets.
  • A rebound in capex following the pandemic.
  • Recovery in inbound tourism.
• However, domestic demand is fragile, with consumption sensitive to rising wages, tax burdens, and inflation-adjusted incomes.
• Structural headwinds persist, including an ageing population, weak productivity growth, and supply-side constraints.

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Earnings & Sector Composition

• The Nikkei 225 is heavily weighted toward:
  • Export-oriented industrials
  • Automakers
  • Technology hardware and electronics
  • Financials
• Japanese corporates have benefitted from a weaker JPY, which has improved export competitiveness and boosted earnings in local currency terms.
• Earnings growth has been solid, supported by strong demand in key sectors and cost control, though margin pressures remain from rising input costs and wage growth.

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Currency & Trade Sensitivity

• The Nikkei 225 is structurally sensitive to the USD/JPY exchange rate.
• BoJ’s policy normalization and improved wage dynamics may reduce JPY depreciation pressure, but global risk sentiment and US rate policy remain dominant FX drivers.
• US auto tariffs pose a material risk to Japanese automakers and export-dependent companies, as Japan’s auto exports to the US could face margin compression and production shifts.
• Trade tensions and global demand softness would weigh on Japan’s export sector, directly impacting the Nikkei.

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Geopolitical & Global Risk Factors

• Global equity market sentiment, US monetary policy, and geopolitical developments—particularly in US-China trade relations—remain key external risks.
• Japan’s proximity to regional geopolitical flashpoints (China, Taiwan) adds further headline risk to investor sentiment.

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Financial Conditions & Market Structure

• Domestic equity markets have been supported by:
  • Increased corporate buybacks.
  • Rising shareholder returns.
  • Structural reforms aimed at improving corporate governance and ROE.
• The BoJ’s policy normalization has so far not led to a material tightening of financial conditions, keeping equity market liquidity ample.

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Summary

‍The Nikkei 225’s macroeconomic backdrop is characterized by a supportive domestic policy environment, structural corporate reforms, and strong earnings momentum, particularly in export sectors. However, it is increasingly exposed to global trade risks, particularly US tariffs, a slowing China, and global risk sentiment. BoJ policy normalization introduces new dynamics but is unlikely to meaningfully tighten conditions in the near term. Currency volatility, external demand, and geopolitical developments remain the key market drivers for the Nikkei 225 in 2025.