Executive Summary

• Global equities delivered mixed results with European markets outperforming their US counterparts. The ASX 200 reached a record high in February before retreating in March.
• Gold emerged as a standout performer, breaking through US$3,000 amid increased demand for safe-haven assets.
• Central banks followed divergent paths with the RBA cutting rates while the US Federal Reserve kept rates on hold.
• Looking ahead, investors face a complex environment shaped by US growth concerns, evolving central bank policies, and ongoing trade tensions.

Trade Tensions Reignite

January began with immediate market impact as the Trump administration implemented wide-ranging tariffs. These trade actions primarily targeted China but extended to traditional US allies including Canada and Mexico, with European Union tariffs implemented in March.

Corporate earnings calls reflected this shift, with tariff-related discussions jumping 190% compared to the previous quarter. Many firms announced supply chain restructuring plans to reduce dependencies.

Australia’s GDP growth is projected to reach approximately 2.2% in 2025 according to the most recent forecasts from the Reserve Bank of Australia. This represents a moderate recovery from slower growth in 2024, with the Australian economy expected to outpace about 60% of G20 economies despite ongoing challenges from inflation and global trade uncertainties.

Meanwhile, as of 31 March, the United States’ growth projections have been revised downward to around 1.9% for 2025, down from 2.8% in 2024.

Tech Sector Volatility

January’s tech sector outperformance vanished when Chinese AI startup DeepSeek released its cost-effective large language model. NVIDIA shares plunged approximately 20% on concerns that Chinese AI capabilities could match US technology at lower costs, spreading weakness across the semiconductor sector.

Corporate focus on “agentic AI” intensified, with mentions in quarterly reports rising 275% from Q4 2024. The US government announced “Stargate,” its multi-hundred-billion-dollar AI infrastructure initiative, while international regulatory frameworks took shape at the French AI Action Summit.

Information technology stocks showed modest declines in January despite broader market gains, with weakness in companies exposed to AI competition.

Central Bank Divergence

Monetary policy decisions reflected regional economic variations throughout the quarter. The Federal Reserve maintained its target rate at 4.25%-4.5% while signalling potential future cuts. The European Central Bank reduced rates to 2.5%, continuing its easing cycle, while the Bank of Japan raised its benchmark to 0.5%.

In Australia, the Reserve Bank cut its cash rate by 25 basis points to 4.10% in February—its first reduction since November 2020. The NAB economics team forecasts 3 more 25-basis point cuts in 2025, taking the cash rate down to 3.35% by December.

Equity Market Performance

Global equities advanced during Q1, with European markets outperforming their US counterparts. Sector divergence characterised the quarter, with financials, healthcare, and communication services delivering solid returns while technology stocks faced headwinds.

The ASX 200 declined 2.85% in Q1, the February-March reporting season revealed mixed corporate performance, with 58% of companies beating earnings expectations compared to 64% previously.

Australian Dollar and Commodities

The Australian dollar traded between 0.615-0.64 against the US dollar (USD), stemming from USD strength following Trump’s inauguration, Chinese economic sluggishness affecting Australian exports, and the RBA’s rate cut.

Gold emerged as a standout performer, breaking through US$3,000 to reach historic highs on 14 March, reflecting demand for safe-haven assets. Copper prices showed positive momentum, rising from around US$8,700 per tonne in early January to approximately US$9,900 by late March.

Labour Market Trends

Australian labour market data revealed mixed signals. While official unemployment remained stable at around 4.1%, February figures showed an unexpected decline in overall employment. The participation rate eased back from January’s record level but remained historically strong.

Corporate hiring sentiment suggested caution, with discussions about recruiting declining while mentions of hiring freezes and layoffs increased substantially compared to late 2024.

Looking ahead

As investors position for Q2 2025, several key factors warrant attention:

• US Growth: Federal Reserve projections show US GDP growth at 1.7% for 2025, with April’s preliminary Q1 GDP release expected to provide crucial signals about whether this moderation is unfolding as predicted.

• US Inflation: Recent data confirms inflation at 2.8% in February 2025, down from 3% in January, with potential upside risk as tariff impacts feed through supply chains.

• AI Investment Rotation: After Q1’s tech volatility, focus is shifting from AI developers to infrastructure providers. With major tech firms planning US$320 billion in AI spending for 2025, power generation and data centre investments are poised to benefit.

• Trade Policy Implications: Current US tariff structure includes 10% on Canada/Mexico imports, 20% additional duties on Chinese goods, and 25% on steel/aluminium. April announcements on “reciprocal tariffs” could substantially broaden these measures.

• Supply Constraints: Corporate inventories have declined for three consecutive quarters, leaving little buffer against potential supply disruptions as tariffs redirect supply chains.

This combination of divergent monetary policies, ongoing trade tensions, and technological disruption is creating an unusually complex environment for both tactical and strategic investment decisions as Q2 begins. While many stocks appear oversold following March’s volatility, investors should remain cautious and selective when identifying opportunities in the current market environment.

To discover more call 1300 683 106 or email us on investordesk@nab.com.au

The information contained in this article is believed to be reliable as at April 2025 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs.  Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article.

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