Equity Markets Rally as Volatility Eases
January 2025 saw robust performance across European and US equity markets, with the EuroStoxx 50® Total Return gaining +8.10% and the S&P500® Total Return rising +2.78%. Market sentiment was buoyed by a decline in implied volatility, as the VStoxx® ended the month at 15.0%, while credit spreads also tightened, with the iTraxx Crossover® (S39) moving from 313bps to 288bps.
January set a positive tone for the year, with equity markets rallying, volatility easing, and corporate activity picking up pace. While new AI developments and geopolitical uncertainties introduced brief turbulence, the broader market momentum remains resilient.
Convertible Bond Strategies: A Quiet Start to the Year
The convertible bond (CB) market experienced a subdued January, with limited new issuance across regions. Japan saw valuations stabilize after prior volatility, while the primary market remained quiet, with only one notable synthetic CB issued by Citi Bank for Airbus, valued at €400m and tailored for long-only funds.
The emergence of new AI solutions, such as DeepSeek, disrupted the tech sector, challenging existing paradigms and creating significant volatility for certain corporates. This development drove performance in CB trading strategies, particularly through gamma trading and higher implied volatilities on correlated names like Schneider.
In the US, 5-year yields edged lower from 4.38% to 4.33%, and HY CDX spreads narrowed slightly from 311bps to 300bps. The market started slowly due to holidays surrounding President Carter’s funeral and Martin Luther King Day. However, volatility spiked late in the month following the DeepSeek announcement, though the broader market momentum remained intact.
Volatility Strategies: Risk Appetite Returns
January was marked by a collapse in volatility, driven by increased risk appetite and a relatively smooth US presidential inauguration. Market participants had anticipated potential disruptions from Donald Trump, but the unexpected announcement of DeepSeek AI introduced short-lived turbulence. This development briefly dampened sentiment but failed to derail the bullish momentum, particularly in European equities, which outperformed significantly.
Corporate Activity Resurges in Europe
Corporate activity in Europe gained momentum in January, setting the stage for an active year ahead. The long-awaited takeover of DS Smith by International Paper was finally completed after a year of twists and turns, including a bidding war with Mondi and a failed attempt by Brazil’s Suzano to intervene.
Other deals also progressed, with BBVA’s bid for Sabadell awaiting approval from Spanish authorities, leading to tightening spreads. Similarly, ADNOC’s acquisition of Covestro regained traction after initial concerns tied to Germany’s snap election in late 2024.
The financial sector has been particularly active, with BBVA’s move on Sabadell sparking a wave of consolidation. Unicredit’s interest in Commerzbank and Banco BPM, Banca Monte dei Paschi’s acquisition of Mediobanca, and Generali and Natixis’ plans to merge asset management activities all point to a resurgence in M&A. Outside financials, Tripadvisor rallied after agreeing to merge with Liberty Trip on favorable terms.
Macro Trends: Gold Shines as Deglobalization Accelerates
Macro trading delivered strong performance in January, with gold leading the way. As our highest-conviction trade for the year, gold benefits from global fiscal exuberance and emerging market central banks diversifying away from USD-denominated assets. We expect the new US administration to further accelerate deglobalization, supporting our bullish stance on the precious metal.
Currencies markets also experienced some dislocations as they navigated Trump’s tariff announcements. While we remain cautious on equities, particularly given excess capacity in the manufacturing sector, we are not overly concerned about inflation. Our focus remains on monitoring liquidity and fiscal positions to assess the trajectory of the ongoing business cycle.
Risk Warning
The views and opinions expressed are the views of Boussard & Gavaudan and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All material(s) have been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.
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Past performance is no guarantee of future results and the value of such investments and their strategies may fall as well as rise. Capital security is not guaranteed.