Global Macroeconomic and Financial Markets Outlook (Per Asset Class) 2025.

- By Chinedu Okoye 

Introduction:

As 2024 concludes with a mixture of optimism and caution, global financial markets are gearing up for an interesting but volatile year ahead. Asset prices remain tethered to underlying economic and financial conditions, however the prevailing Macroeconomic landscape signals distinct overall trajectories for key asset classes.

Here, we present our expectations for the first quarter of 2025 across Commodities, Cryptocurrencies, Fixed Income, and Equities, offering a structured outlook informed by macroeconomic trends and sector-specific dynamics.

Macro Outlook Q1 2025 for Different Asset Classes:

We look at four asset classes, stating our expectations, on a broad-scale which could the be complemented with due diligence, and make for a more informed decision making with the inclusion of Zero Equilibrium's Insights.

Commodities (Gold, Silver, Oil and Gas):

This market segment is expected to be dependent on Consumer spending patterns, but muted by a strong dollar where aggregate demand doesn't change drastically.

A hawkish Fed is bearish for Gold, but a "supportive" or "accommodative" monetary policy environment could keep Crude oil bid. Weaker economic numbers (and earnings reports) would be bullish for gold, as safety appeal attracts private (institutional investors portfolios) and public (Central Banks Reserve Asset) allocation to the yellow metal.

Crypto:

The crypto market appears —in our opinion—poised for a rebound, with Bitcoin likely to lead a renewed bull cycle once the prevailing uncertainty abates. 

Institutional Support: Increased policy accommodation and institutional interest could amplify market volatility, presenting both opportunities and risks.

Alternative Assets: Gold-backed cryptocurrencies (e.g., PAXG, XAUT) may offer stability amid the sector’s inherent turbulence, appealing to risk-averse investors. They also offer a chance to diversify ones crypto portfolio.

Fixed Income:

Corporate and Sovereign bonds yields could widen in EM countries and tighten in DM markets –most especially US. However the risks are uneven amongst country groups and across, as divergent trends in both markets offer a mixed outlook.

Sovereigns:

The prospects for a QE resurgence, and increased uncertainty makes US (and European) bonds underpriced. Given that rates could only go lower, current yields look attractive.

DM sovereigns can offer price appreciation as well as yields (relative to high yields), whilst short to medium (1-5 year), EM Bonds offer high yields with considerably higher Exchange Rate risks, this makes EM sovereigns carry the potential for offering the best reward-risk balance.

Corporate Bonds:

Private fixed-income carry equity type risks as companies are exposed to underlying financial and economic risks, upon which earnings reports and solvency could depend on.

We could see high-yield spreads widen as Central Banks (excluding or including the Fed) ease policy, in reaction to weaker economic data. 

Equities:

Equities stand out as the most promising—or at least stable—asset class in Q1 2025, owing no small amounts to fiscal incentives such as tax cuts.

Though industrial impacts may vary, we expect this segment of the financial markets to perform stronger —or at least be less volatile—in Q1 2025. However poor company financials and uncertainty/weaker economic environment could keep stocks from be limiting if the uprise into the first quarter of the new year

Underlying Macroeconomic Factors: How Developments in the US and China could affect Markets

With the Federal Reserve focusing on inflation, the data points to a stronger than expected year end economic growth and projections for 2025. The implications of this is a stronger US Dollar. Potential for a redfined trade policy between the US and it's allies also makes for a potential headwind for economies and stocks exposed to both countries.

Should the US inflation persists, the Fed could react by cutting smaller or not cutting at all, making for a narrower high yield spread than earlier priced in. This is also bearish for Frontier Market Sovereigns.

A redefined trade relationship with China could have implications for industrial activity, and further detoriations in industrial profits. This would mean lower yields for Chinese government bonds as the PBOC looks ever ready to step in with stimulus. A slowdown in China would be negative for economies and compnaies dependent or tied to commodities.

Economic Indicators to Watch:

To stay ahead of the curve, traders and investors would want to pay a close attention to the following economic releases for both economies

1. China Economic Indicators:

a. Industrial Profits

b. Industrial Output

c. Retail Sales

Industrial performance in China would come from a stronger local demand (export demand outside the US, is expected to be muted given the cost and currency advantages Fed into pricing.

So consumer demand would inform PBOC monetary policy decisions, if industrial output and profits stay in the decline or grow at a slower than desired rate. The chart below shows China's industrial output growing at a slower pace after a steep slump early in the year.

Although Industrial output grew +5.80% in November (10 bps higher than last year), industrial profits declined erarly in the year and has since grown at a steady pace since the slump. Should industrial profits struggle in Q1, may see more easing by the PBOC which could cushion deckines in aggregate demand for Oil and other Commodities.

(Chart 1: China Industrial Profits [November 2023 - November 2024].)

In comparison chart 2 shows reteal sales still at a decade low, indicating a less confident China consumer relative to the US. Continual tepid growth in retail sales (a gauge for consumer confidence), would also necessitate more easing.

(Chart 2: Retail Sales China [2000-2024]).

2. US Economic Indicators:

a. CPI (core and headline)

b. PCE

c. JOLTS (Jobs Numbers).

Strong US consumption would impact CPI and keep rates higher for longer which would impact yield spreads on high yield bonds and Emerging and Frontier sovereign market denominated bonds.

It will however be bullish for Commodities —especially Oil and Natural Gas. Oil has stayed within $67 and $69 range for WTI and $71 - $73 range for BRENT, any uptick in consumer strenght would mute global oil supply increases attributed to the US (WTI).

(Chart 3: WTI y-o-y)

With the OPEC supply held at current levels for 3 consecutive meetings, Crude could break this range upwards. Ultimately a weaker China would translate to a weaker Asia and dampen these effects, keeping Oil within range or lower.

(Chart 4: BRENT y-o-y)

Oil currently above resistance level, is indicative of strength going into 2025, even though both benchmarks are down in a yearly basis, the current macro and market conditions looked poised to keep prices at these levels as it inches up higher through Q1 (2025).

Key Takeaways:

Demand strength (consumer confidence), would be a major determining factor for commodities, which face headwinds going into 2025.

Demand for commodities in our watchlist (Precious Metals, Oil and Gas), would depend a lot on the strength of the consumer in China and the US, as supply dynamics aren't expected to change much 

Cryptos will be the most volatile asset class in the year as it offers the most upside and potential downside depending on the markets risk appetite.

Short to medium term sovereign bonds in both emerging/frontier and developed markets, would remain high bid int Q1 as investors seek safety, liquidity and yields. Corporate bonds in the US are expected to be stronger than their DM counterparts.

Equities would be the strongest or most stable asset class in Q1 2025, as the markets have already priced in political (Trump victory), Macro, and company specific risks.

Industries such as; Utilities, Energy, and (Value) Tech offer the most potential upside from our view. We could also be more watchful of; Operating Cash flow and debt ratios than P/E Valuations.