A welcome boost

The recent rally in stocks was fueled by strong fourth-quarter earnings from major US banks like JP Morgan, Goldman Sachs, and Wells Fargo, which surpassed expectations. This positive market sentiment was further supported by mixed inflation data, with core inflation slightly easing to 3.2% year-on-year, providing some relief regarding potential rate hikes. The nuanced inflation picture, however, saw headline inflation increase to 2.9%, marking a continued rise since September, indicating ongoing inflationary pressures.

Investors remain cautious as they assess the implications of Donald Trump's impending inauguration, which adds an element of uncertainty to the market environment. Despite this, Damian McIntyre from Federated Hermes suggests that the combination of decreasing inflation, a robust economy, and a healthy job market could create favorable conditions for risky assets in 2025.

The US financial sector faced a challenging year, influenced by volatile markets and the Federal Reserve's interest rate cuts. However, the outlook for banks is improving, driven by resilient net interest income and strong fee income from capital markets. Filippo Maria-Alloatti highlights that banks are benefiting from reduced loan-loss provisioning and a revival in dealmaking, which has exceeded expectations.

In the UK, inflation unexpectedly fell to 2.5% year-on-year, strengthening the likelihood of a rate cut by the Bank of England. This decline in inflation, particularly in the service sector, has provided support to gilts, recovering from a recent sell-off. Orla Garvey notes that despite this relief, the UK remains vulnerable to similar challenges due to a weak growth outlook, although the financial conditions and growth outlook make the UK front-end relatively attractive.