Executive Summary

Global financial markets produced mixed returns during February 2025 as investors reassessed US economic growth, trade policy and the sustainability of the artificial-intelligence investment boom. European equities continued their strong start to the year, while US shares weakened and digital assets experienced a substantial correction.

US markets were affected by softer economic indicators, uncertainty surrounding tariffs and continued concern about the implications of lower-cost artificial-intelligence models. The S&P 500 declined modestly, while the technology-heavy Nasdaq suffered a larger fall as semiconductor and software shares came under pressure.

European equities outperformed and reached further record highs. Banks, industrial companies and defence contractors benefited from stronger earnings, comparatively attractive valuations and expectations that European governments would increase military and infrastructure spending.

Diplomatic efforts led by the United States created hopes that negotiations could reduce or end the war in Ukraine. The prospect of a ceasefire supported European risk appetite, although political disagreement over the future security of Ukraine and Europe's role in negotiations created considerable uncertainty.

The Bank of England reduced Bank Rate from 4.75% to 4.50%. The decision reflected weak UK growth and gradually moderating inflation pressure, although policymakers remained cautious because of elevated wages and services inflation.

The Federal Reserve did not hold a policy meeting during February. US Treasury yields declined as weaker consumer and business indicators increased expectations that the central bank could resume easing later in 2025.

Germany's federal election produced a victory for the CDU/CSU alliance, placing Friedrich Merz in a strong position to form the next government. Investors anticipated greater defence and infrastructure spending, as well as possible reform of Germany's restrictive fiscal framework.

China's technology sector attracted renewed attention as DeepSeek strengthened confidence in the country's ability to develop competitive artificial-intelligence systems. Chinese and Hong Kong technology shares generally outperformed despite continued weakness in property and household demand.

Gold reached additional record levels as tariff concerns, geopolitical uncertainty and declining US yields supported demand. Bitcoin and other digital assets declined sharply as leveraged positions were reduced and investors moved away from speculative assets.

Key Themes During February

• European equities substantially outperformed the United States.
• US technology and semiconductor shares weakened.
• Concerns increased about US growth and consumer confidence.
• The Bank of England reduced Bank Rate to 4.50%.
• US Treasury yields declined as investors anticipated future Federal Reserve easing.
• Germany's CDU/CSU alliance won the federal election.
• European defence shares rallied on expectations of higher military spending.
• DeepSeek continued to reshape assumptions about AI development costs.
• Gold reached new record highs.
• Bitcoin and broader digital-asset markets declined sharply.

Global Economic Overview

The global economy remained highly uneven during February. The United States continued to expand, but several indicators suggested that momentum was moderating. Europe remained weak in absolute terms but benefited from lower interest rates and expectations of greater fiscal support.

United States

US economic data became less consistently positive. Consumer-confidence surveys weakened, retail indicators softened and selected business surveys pointed to greater uncertainty surrounding tariffs and federal policy.

The labour market remained broadly stable, although companies became more cautious about hiring. Investors increasingly considered whether policy uncertainty could discourage investment and household spending.

US Inflation and Federal Reserve

Inflation remained above the Federal Reserve's 2% objective. Consumer-price data continued to show persistent pressure within housing and services, limiting the central bank's ability to respond immediately to weaker growth indicators.

The Federal Reserve maintained its policy range at 4.25%–4.50% following its January meeting. Policymakers indicated that the economy remained sufficiently strong to allow patience before delivering further reductions.

Markets nevertheless increased expectations of easing later in the year as Treasury yields declined and concerns about growth intensified.

Eurozone

The eurozone economy remained close to stagnation, but business confidence showed tentative improvement. Services were more resilient than manufacturing, while lower interest rates provided gradual support to financing and household demand.

The European Central Bank had reduced its deposit rate to 2.75% at the end of January. Investors continued to expect further cuts during the first half of 2025.

Germany

The CDU/CSU alliance won the German federal election held on 23 February. The result began a period of coalition negotiations, with economic reform, migration, defence and public investment expected to dominate the agenda.

Investors focused particularly on whether the next government would modify Germany's constitutional debt brake or create alternative mechanisms to finance infrastructure and defence expenditure.

France

France continued to face fiscal and political constraints. The government sought to pass a budget while controlling a deficit that remained substantially above European Union guidelines.

United Kingdom

The Bank of England reduced Bank Rate to 4.50%. The Monetary Policy Committee remained divided over the appropriate pace of easing, reflecting the combination of weak activity and persistent domestic inflation.

UK growth remained subdued, and businesses prepared for higher employer National Insurance contributions scheduled to take effect in April. Employers considered higher prices, lower hiring and reduced wage growth in response.

Japan

Japan's economy continued to benefit from wage growth and moderate inflation. The Bank of Japan had raised its policy rate to approximately 0.5% in January and continued to signal gradual normalisation.

China

China's property market and household demand remained weak. Authorities continued implementing targeted support while emphasising technology, advanced manufacturing and domestic innovation.

DeepSeek's emergence provided a symbolic boost to China's technology sector and encouraged investors to reassess the country's competitive position in artificial intelligence.

Global Trade

Tariff uncertainty became an increasingly important economic risk. The US administration announced or threatened duties affecting China, Canada, Mexico, steel and aluminium, while trading partners prepared possible responses.

Businesses faced difficulty planning supply chains and investment while the final scope and timing of tariffs remained uncertain.

Equity Markets

Equity-market performance diverged sharply by region. European shares advanced, while US equities declined and Chinese technology stocks benefited from renewed investor interest.

United States

The S&P 500 declined by approximately 1.4%, while the Nasdaq Composite suffered a larger fall. Concerns about economic growth, tariffs and highly valued technology companies affected sentiment.

Defensive sectors such as healthcare and consumer staples generally proved more resilient. Banks and cyclical companies were affected by declining yields and concern about slowing activity.

Technology and Semiconductors

Technology shares remained under pressure following January's DeepSeek disruption. Investors continued to question whether the largest cloud providers and semiconductor customers would maintain previously projected capital expenditure.

Nvidia reported strong revenue and demand, but its shares remained volatile because expectations were exceptionally high. Investors focused on the transition to its Blackwell processor architecture and the sustainability of data-centre spending.

Europe

European equities advanced and reached new highs. Banks benefited from strong earnings and shareholder distributions, while defence and industrial companies gained from expectations of increased government spending.

Lower valuations relative to the United States also encouraged international investors to increase exposure.

European Defence

Defence contractors were among the strongest performers. European governments faced growing pressure to increase military budgets as the United States reconsidered the nature of its security commitments.

Companies supplying ammunition, vehicles, air-defence systems, electronics and military communications experienced substantial investor demand.

United Kingdom

UK equities advanced, with the FTSE 100 supported by banks, defence companies, healthcare and internationally exposed businesses.

The Bank of England's rate reduction supported selected domestic sectors, although weak growth and rising employment costs remained concerns.

Japan

Japanese equities produced mixed returns. Banks benefited from higher domestic interest rates, while exporters remained sensitive to yen movements and tariff uncertainty.

China and Hong Kong

Chinese and Hong Kong technology shares performed strongly. Investors reassessed valuations after DeepSeek demonstrated competitive artificial-intelligence capabilities.

Internet platforms, cloud providers and semiconductor-related businesses benefited, while property developers remained under pressure.

Emerging Markets

Emerging-market performance was mixed. Chinese technology provided support, while tariff-sensitive markets and currencies remained vulnerable.

Indicative February Performance

Fixed Income Markets

Government bonds generally advanced during February as investors became more cautious about economic growth. Falling yields provided positive returns across several developed markets.

US Treasuries

The US 10-year Treasury yield declined towards approximately 4.2% by month-end. Softer economic indicators and demand for defensive assets outweighed persistent inflation concerns.

Shorter-dated yields also fell as markets increased expectations of Federal Reserve easing later in 2025.

European Government Bonds

German Bunds advanced as weak regional growth supported expectations of additional ECB cuts. Anticipated increases in defence and infrastructure spending limited the decline in longer-term yields.

UK Gilts

UK gilts benefited from the Bank of England's rate reduction and weak growth forecasts. Persistent inflation and future government borrowing remained countervailing risks.

Japanese Government Bonds

Japanese yields remained elevated as investors anticipated further gradual Bank of Japan tightening.

Corporate Credit

Investment-grade credit remained supported by lower government yields and generally healthy company balance sheets.

High-yield spreads widened modestly as US growth concerns increased. Lower-quality borrowers remained exposed to refinancing costs and weaker earnings.

Private Credit

Private credit continued to provide acquisition and refinancing capital. Expected future rate cuts could improve borrower affordability, but floating-rate interest expense remained high.

Competition for high-quality transactions continued to reduce margins and lender protections.

Foreign Exchange

The US dollar weakened during February as Treasury yields declined and concern about domestic growth increased.

US Dollar

The dollar surrendered part of its post-election advance. Markets increased expectations that the Federal Reserve could resume easing later in the year.

Euro

The euro remained comparatively stable. Weak regional growth was offset by improved investor sentiment towards European assets.

Sterling

Sterling weakened initially following the Bank of England's rate cut but remained supported by the comparatively high level of UK rates.

Japanese Yen

The yen strengthened as US yields declined and investors anticipated further Bank of Japan normalisation.

Chinese Renminbi

The renminbi remained under pressure from tariff risk and domestic monetary support. Authorities continued to prevent disorderly depreciation.

Commodities

Gold remained the strongest major commodity, while oil and industrial metals were affected by growth and trade-policy uncertainty.

Gold

Gold reached additional record highs as Treasury yields declined and investors sought protection from tariffs, geopolitical uncertainty and currency volatility.

Central-bank purchases remained an important source of structural demand.

Oil and Energy

Oil prices declined towards a two-month low as investors became more cautious about US, European and Chinese demand. Prospects for increased production also affected sentiment.

Copper and Industrial Metals

Copper produced mixed performance. Tariff concerns and weak manufacturing demand offset long-term expectations connected to electricity and data-centre investment.

Iron Ore

Iron ore remained sensitive to Chinese property activity and expectations for additional economic support.

Agricultural Commodities

Coffee and cocoa remained historically elevated because of weather and supply constraints. Grain prices varied according to crop and export conditions.

Digital Assets

Digital assets experienced a severe correction during February as leverage, risk aversion and security concerns affected the market.

Bitcoin

Bitcoin declined substantially from its January record. ETF flows weakened and investors reduced speculative exposure as technology shares and broader risk appetite deteriorated.

Ethereum

Ether underperformed Bitcoin as institutional ETF demand remained modest and competition from alternative networks continued.

Market Security

A major security breach affecting the digital-asset industry reinforced concern about custody, exchange and operational risk. The event demonstrated that blockchain ownership remained dependent upon secure infrastructure and counterparties.

Risk Considerations

• Leverage amplified the market correction.
• ETF demand weakened during risk-off trading.
• Custody and exchange security remained material risks.
• Regulatory expectations had moved ahead of actual legislation.
• Digital assets remained highly correlated with speculative technology exposure.

Private Equity

Private-equity markets remained active but cautious during February. Lower government yields improved the financing outlook, while tariff uncertainty and weaker US market sentiment complicated investment decisions.

Deal Activity

Healthcare, business services, software, defence technology and infrastructure remained active sectors. European assets attracted greater interest as public-market confidence improved.

Financing

Lower Treasury and government-bond yields offered some relief, although total borrowing costs remained well above their pre-2022 levels.

Banks and private-credit managers continued competing for high-quality transactions.

Technology Investments

Investors reassessed AI-related businesses following DeepSeek. Greater attention was placed on operating efficiency, customer demand and defensible data rather than infrastructure spending alone.

Defence and Aerospace

Expected increases in European military expenditure strengthened interest in defence suppliers, cybersecurity, communications and aerospace services.

Exits and Fundraising

European equity strength supported the potential IPO pipeline, while weaker US technology markets increased uncertainty. Fundraising remained concentrated among established managers.

CE Global Private Equity Observations

• European assets attracted renewed investor attention.
• Defence and security became increasingly important themes.
• AI underwriting shifted towards efficiency and commercial adoption.
• Tariff exposure required detailed supply-chain analysis.
• Exits and distributions remained central to fundraising conditions.

Artificial Intelligence & Technology

Artificial intelligence remained central to market debate, with investors increasingly focused on efficiency, competition and the returns generated by infrastructure expenditure.

DeepSeek

DeepSeek's lower-cost models encouraged enterprises and developers to examine alternatives to the most expensive proprietary systems.

The development increased concern about pricing power among model providers while potentially accelerating broader AI adoption.

Semiconductors

Demand for advanced processors remained substantial, but forecasts became more sensitive to model efficiency and customer capital budgets.

Cloud Computing

Cloud providers continued expanding AI infrastructure. Investors required clearer evidence that increased usage would compensate for data-centre, processor and electricity costs.

Enterprise Adoption

Lower model costs improved the economic case for customer service, coding, research and document-analysis applications.

Cybersecurity

The expansion of accessible AI increased both security capabilities and the sophistication of fraud, phishing and malicious software.

Technology Risks

• Lower-cost models could reduce pricing power.
• Capital expenditure could exceed commercial demand.
• Semiconductor forecasts remained vulnerable to efficiency improvements.
• Open models increased security and governance challenges.
• Tariffs and export controls could fragment technology markets.

Sector Spotlight

European Defence and Security

February's sector spotlight examines European defence and security as governments prepared for a sustained increase in military expenditure.

Strategic Background

Uncertainty surrounding US security commitments increased pressure on European governments to strengthen independent defence capability.

The continuing war in Ukraine also demonstrated that ammunition, air defence and production capacity remained insufficient.

Priority Areas

• Air and missile defence
• Ammunition and explosives
• Drones and counter-drone systems
• Secure communications
• Cybersecurity
• Military vehicles and maintenance
• Satellite intelligence

Industrial Capacity

Manufacturers faced the challenge of expanding production after decades of limited demand. New factories, skilled employees and long-term government contracts were required.

Private-Market Opportunities

Smaller suppliers offered exposure to components, software, testing, maintenance and dual-use technology without depending entirely upon large weapons programmes.

Principal Risks

Defence procurement remained political, slow and highly regulated. Valuations also increased rapidly as investors anticipated higher budgets.

Investment Perspective

European defence appeared positioned for a multi-year investment cycle. The strongest opportunities combined scarce technical capability, recurring service revenue and diversified government customers.

Regulatory Update

Regulatory developments during February focused on tariffs, artificial intelligence, defence procurement and digital-asset security.

US Tariffs

Businesses prepared for duties affecting China, Canada, Mexico, steel and aluminium. The timing and scope of implementation remained uncertain.

Artificial Intelligence

The first provisions of the EU Artificial Intelligence Act began applying in February, including restrictions on certain prohibited uses and obligations concerning AI literacy.

Defence Regulation

Companies entering defence supply chains needed strong export-control, cybersecurity, sanctions and anti-corruption procedures.

Digital Assets

Security incidents increased attention on custody, operational resilience and the segregation of client assets.

Private Markets

Managers continued to face scrutiny concerning valuations, fees and conflicts despite expectations of broader US deregulation.

Compliance Priorities

• Assess exposure to tariffs and retaliation.
• Implement AI-literacy and prohibited-use controls.
• Review defence-sector export and sanctions compliance.
• Strengthen digital-asset custody due diligence.
• Maintain independent private-asset valuations.
• Review supply-chain resilience and contractual pricing.

Looking Ahead

Markets entered March focused on the implementation of US tariffs, European defence policy, central-bank decisions and the sustainability of the rotation away from US technology.

US Trade Policy

Tariff implementation and retaliation would influence inflation, corporate margins, currencies and business investment.

Federal Reserve

The Federal Reserve was expected to remain on hold. Investors would examine inflation and labour-market data for evidence that easing could resume later in the year.

European Central Bank

The ECB was expected to deliver another rate reduction as regional growth remained weak.

Germany

Coalition negotiations would determine whether the next government could expand defence and infrastructure investment and reform fiscal constraints.

Bank of England

The Bank of England was expected to proceed gradually after February's cut. Wage and services inflation remained important barriers to faster easing.

Artificial Intelligence

Investors would continue assessing the implications of lower-cost models for processors, cloud providers, software pricing and data-centre development.

Digital Assets

The market would monitor ETF flows, regulatory appointments and the consequences of recent security failures.

Private Markets

Defence, infrastructure and efficient AI solutions could attract additional capital. Tariffs and supply-chain risk would require conservative underwriting.

CE Global Private Equity Perspective

February demonstrated that regional diversification remained valuable. European equities benefited from lower valuations and changing fiscal expectations while US technology shares corrected.

The prospective increase in European defence spending could create a durable investment cycle across manufacturing, cybersecurity, communications and maintenance.

CE Global Private Equity believes that opportunities remain across defence technology, efficient AI, healthcare, infrastructure and specialist business services. Entry valuations require care after the rapid appreciation of selected European sectors.

Tariff uncertainty and slowing US indicators reinforce the importance of moderate leverage, flexible supply chains and multiple exit routes.

This market review is provided for general information and discussion purposes only. It does not constitute investment, legal, tax or other professional advice, nor an offer or solicitation to purchase or sell any security, financial instrument or investment product. Market values can rise or fall, and past performance is not a reliable indicator of future results.