Fall from grace?

Market index returns

Week to date since February 19, 2025 as of February 26, 2025

Index definitions: Global Real Estate = FTSE EPRA/NAREIT Developed Index; Global Infrastructure = Dow Jones Brookfield Global Infrastructure Index; Natural Resource Equities = S&P Global Natural Resources Index; Commodity Futures = Bloomberg Commodity Index; TIPS = Barclays US TIPS Index; Global Equities = MSCI World Index; Real Assets Index = 30% FTSE EPRA/NAREIT Developed Index, 30% Dow Jones Brookfield Global Infrastructure Index; 15% S&P Global Natural Resources Index; 15% Bloomberg Commodity Index, 10% Barclays TIPS Index. Source: Bloomberg, DWS. Past performance is not indicative of future results. It is not possible to invest directly in an index.

Market commentary

Tariffs, the negotiating cudgel of choice for U.S. President Trump were reaffirmed for Canada and Mexico. As it stands, 25% tariffs will be levied on Canada and Mexico at the end of the current one-month grace period on March 4th. The President also announced an additional 10% tariff on imports from China to be enacted on the same date. The stated rationale for the move is to force the governments to stop the flow of illicit drugs, such as fentanyl, into the U.S. This is despite further border measures implemented by Canada and Mexico. These levies are in addition to the reciprocal tariffs to be enacted on April 2nd. Barring any further action, the tariffs will hit over $1 trillion of goods imported into the U.S., which could raise costs for consumers, drive inflation, and slow economic growth. Also contributing to the trade uncertainty is a proposal by the Office of the United States Trade Representative to charge substantial fees on Chinese-made shipping vessels who dock at U.S. ports. The fees would be scaled to the composition of Chinese-made ships in the shipper’s fleet. This would increase shipping costs, which would ultimately feed through to consumer prices.

Global equity markets had a tough week of performance as faith in U.S. economic performance faltered. Global stock performance was led by the Healthcare, Consumer Staples, and Real Estate sectors but was outweighed by negative returns in the Technology, Communications, and Consumer Discretionary sectors. The Real Assets Index outperformed Global Equities on the strength of performance in U.S. TIPS (Treasury Inflation-Protected Securities), Global Real Estate securities, and Global Infrastructure. Commodity futures lagged the most and Natural Resource Equities fell behind the Real Asset Index but did outperform the Global Equities market.^[1]

Among some of the indicators we track, the VIX, an index of expected S&P volatility, jumped 25% to 19.1 after a one-month lull. U.S. Treasury yields fell across the curve, as did break evens, which fell 10 bps (basis points) in both the 5- and 10-year segments. Corporate bond prices didn’t follow suit as investment grade spreads widened 5bps and high-yield bond spreads widened 14 bps. The U.S. dollar also weakened 0.7%, down to 106.42 for the DXY index, a measure of dollar’s performance against major peers. Oil and gold prices also moved lower with WTI falling 5% to $68.62 per barrel and gold fell to $2,916 per ounce.^[1]

In geopolitical events, German elections failed to deliver a decisive mandate for reform that Friedrich Merz, the chancellor-in-waiting, was hoping for. Merz needs to form a coalition government to address German economic troubles. The export-led economy is facing a more combative global trade environment and needs to boost defense spending. Merz envisions an outlay of an estimated EUR200 billion to boost military readiness in case of Russian aggression. The debt-financed spending would require a change to the 2009 constitutional amendment that requires a 0.35% gross domestic product (GDP) limit for structural budget deficits. It will be an uphill climb to pass any constitutional amendments because the combined centrist parties (CDU/CSU, SPD and Greens) will not have the required two-thirds majority in the Bundestag, limiting the scope for change.^[2]

Why it matters: Facing disruption in financial markets, trade flows, and corporate revenues, investors need to stay on their toes to factor in new information and potential outcomes.

Macro Dive: We continue to monitor the potential for stickier inflation and recent weakness in soft data indicators, such as confidence measures, to see if it will materially appear in hard data.

• On the weaker side: The Conference Board of Consumer Confidence index fell to 98.3, which was below expectations and below the prior reading. The Dallas Fed’s Manufacturing Outlook (level of general business activity) -8.3 for February, well below the prior reading of 14.1, and under expectations of 6.4. Initial jobless claims rose to 242k for the period ending Feb. 22nd, up from a revised figure of 220k for the prior period. The halt in federal spending has contributed to DC-area initial and continuing unemployment claims hitting their highest levels since March 2023. Personal spending fell 0.2% in January, which was -0.5% in real terms. Both nominal and real spending data came in below estimates and worsened from the prior month’s reading.^[1]

• Landing in the positive(ish) column: Durable Goods Orders rose 3.1% for January, which was above estimates. However, digging deeper into the details, excluding transportation, the orders were flat, and core shipments fell -0.3%, down from 0.3% in the prior period. 3 4Q GDP for the U.S. hit the mark at 2.3% quarter-on-quarter, while personal consumption rose 4.2%, which was above expectations of 4.1%. Personal Income rose 0.9% in January, which was below the prior reading of 0.4%.^[1]

• Inflation watch: The Bureau of Economic Analysis released the U.S. Personal Consumption Expenditures (PCE) price index for January. The data came in “on the screws” as the saying goes, hitting 0.3% MoM and 2.5% YoY for headline and 0.3% MoM and 2.6% YoY for the Core measure. The inflation data appears to reaffirm the market view that the Fed’s FOMC (Federal Open Market Committee) will have room to cut interest rates an additional 50 bps by the end of the year.^[3]

Real Assets, Real Insights: This week we will look at recent data center and utility spending announcements, as well as commodity dislocations from potential tariffs.

• Alternative Financing (Real Estate): News leaked about Apollo Global Management Inc. holding talks with Meta Platforms Inc. to finance $35 billion in data center spending. The talks are in early stages, with no guarantee of completion. Meta has outlined $65 billion in spending on data centers and AI investments. This deal illustrates Apollo’s push to lend to corporations as part of its private credit expansion.^[1]

• Global Spend (Infrastructure): E.ON SE, one of Europe’s largest grid operators, is boosting investments by 15% to EUR8.6 billion to fund grid expansion. The company has additional demand from data centers and is expecting to boost additional spending going forward. EON is a key player in connecting energy sources that are expected to help Europe meet its climate neutral goals. In other AI spend news, New APR Energy is working on plans to use four mobile gas turbines to generate 100 MW of behind-the-meter of electricity for a hyperscaler’s data centers. The company was acquired by Fortress Investment Group and assets include 30 mobile turbine units.^[1]

• Cu later (Commodities): Copper has caught the eye of U.S. President Trump as he looks to reshape the global economy. He has directed the Commerce Department to examine the possibility of implementing tariffs on imports of the commodity. The U.S. produces a significant amount of the metal but also relies on imports from Chile, Canada, Peru, and Mexico to fund roughly 36% of demand. In response, traders have sent prices of the metal higher, and importers have begun to move shipments to the U.S. The copper price differential between the U.S. Comex listings and London’s LME’s has recently reached $1000 per ton.^[1] 

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