Geopolitics Takes Centre Stage as Divergence Continues
February 2025 saw a notable divergence between European and U.S. equity markets, with the EuroStoxx 50® Total Return gaining +3.45% while the S&P500® Total Return declined -1.30%. This split underscored contrasting regional risk appetites, as European markets extended January’s momentum while U.S. investors adopted a more cautious stance amid geopolitical and policy uncertainties.
Volatility Markets: Geopolitical Uncertainty
European volatility markets were driven by corporate mergers, acquisitions, and balance sheet restructuring, with the VStoxx® rising to 18.6% by month-end. The European convertible bond market saw limited primary activity, though Vinci’s €400m non-dilutive convertible issuance stood out. In the U.S., falling 5-year Treasury yields (from 4.33% to 4.02%) buoyed convertibles. However, Microstrategy’s $2bn deal struggled, requiring repricing on more favourable pricing terms and still underperforming post-issuance—a stark contrast to successful launches by Unity Software, Cheesecake Factory, and BridgeBio Pharma.
After a strong start to the year, risk appetite in Europe remained robust throughout February, continuing the trend seen in January. In contrast, sentiment in the US was more mixed and cautious, resulting in a marked divergence between the two regions.
Against this backdrop, demand for hedging activity remained subdued, and realized volatility consistently undershot expectations. At the start of the month, implied volatility levels had priced in a more dynamic market environment, but as realized volatility remained subdued, these expectations were not met.
Geopolitical developments and trade policies remained key market drivers, with tariffs and broader policy uncertainties under the Trump administration keeping investor sentiment in check. These factors contributed to a persistent bid on implied volatility, particularly towards the end of the month, as uncertainty about future developments remained elevated. This was reflected in implied volatility levels, which drifted higher over the course of February despite a relatively stable realized volatility environment.
With ongoing macroeconomic risks and a highly uncertain U.S. political landscape, we remain vigilant and ready to adjust our volatility positioning as market conditions evolve.
Equities: European Banks Lead Amid Consolidation Wave
The European banking sector emerged as a standout, fuelled by sustained equity risk appetite and a surge in M&A activity. Corporate consolidation dominated headlines, with multiple high-profile transactions underscoring the sector’s dynamism. Outside banking, volatile earnings reports highlighted challenges from inflationary pressures and shifting consumer behaviour, though selective opportunities emerged in niche sectors.
Credit Markets: Resilience Amid Tight Spreads
In February 2025, credit markets in Europe and the U.S. demonstrated resilience amid tightening spreads and robust investor demand. In Europe, investment-grade bonds benefited from lower than expected primary issuance volumes and attractive spread premiums, supported by the European Central Bank’s dovish rate cuts.
In this context, French nursing home operator Emeis (formerly Orpea) reported stronger-than-expected Q4 2024 results, with annual revenue of €5.64bn and EBITDA of €245m. The company confirmed advanced talks to sell over €2bn in real estate and operating assets, signalling strategic repositioning after recent struggles.
Macro Trends: Gold Shines as Equities Face Scrutiny
We maintain a bullish stance on gold, anticipating continued fiscal expansion and central bank diversification away from USD assets. We remain cautious on Equities as we observed hedge funds taking profits and reducing gross exposure during the month as geopolitical tensions pushed rates higher. Despite manufacturing overcapacity dampening inflation fears, the team sees potential for a Fed policy shift in March to stabilize risk sentiment.
Outlook: Navigating Uncertainty with Adaptive Positioning
With deglobalization trends accelerating and U.S. political risks unresolved, we emphasize our vigilance in volatility positioning. European corporate activity and selective credit opportunities remain focal points, while gold’s role as a hedge against fiscal and geopolitical shocks grows increasingly prominent.
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