RECAPPING LAST WEEK
The week before last ended with a sharp selloff in the wake of a stronger-than-expected U.S.
employment report, leading the dollar and Treasury yields to surge. Last week started with investors
attempting to recover—major benchmarks regained their footing as the same semiconductor and
artificial intelligence-related shares that bore the brunt of the previous week’s correction stabilized. As
the week progressed, investors focused primarily on inflation data and central bank developments: The
ECB raised rates from 2% to 2.25% in an effort to counter energy-driven inflationary pressures. In spite
of this tightening, negative real interest rates are still providing a stimulative environment. Risk appetites
mostly improved in equity markets thanks to welcome signs that price pressures were not rising as
quickly as some had feared. Almost all S&P 500 sectors were in the green, with Materials, Consumer
Staples, and Technology leading the way while Communication and Energy were the laggards, finishing a
touch under unchanged. Developments in Iran drove commodity markets. On the one hand, tensions
flared after the downing of a U.S. Apache helicopter and resulting U.S. retaliation against Iranian military
sites near the Strait of Hormuz. On the other, hints of a potential agreement between the countries
eased pricing pressure somewhat. Crude oil shrugged off the flareup, with prices reflecting acceptance of
Trump’s claim that the U.S. had escorted tankers containing 100 million barrels of oil through the Strait.
Precious metals declined sharply until midday Thursday, when Trump announced that he had called off a
planned attack and seizure of Iranian oil infrastructure on Karg island—at that point they rallied along
with other risk assets. Crypto responded accordingly with a knee-jerk rally joining the risk on group, but
otherwise was quiet as Bitcoin spent the week consolidating near its YTD low-50% off October’s all-time
high. Friday saw the public market debut of SpaceX, whose IPO valued the company at $1.77 trillion but
quickly rose above $2 trillion when trading opened on the secondary market.
THE WEEK AHEAD
The week’s global economic calendar will focus on the central banks’ response to new inflation-related
data. The Bank of Japan is widely expected to hike rates at the conclusion of its two-day meeting on
Tuesday. As with the ECB, the expected tightening—in the BOJ’s case to 1%, still leaves the bank firmly
in a stimulative posture, with negative real rates. The Reserve Bank of Australia, which was ahead of its
central bank peers in hiking rates to counteract inflationary pressures, is expected to pause at their
current 4.35% overnight cash rate when they issue their policy statement on Tuesday. In the UK, CPI is
released on Wednesday, followed Thursday by the Bank of England, which is expected to hold rates
steady at 3.75%. Back in the U.S., retail sales are released on Wednesday, but more importantly it’s also
the day when new Fed Chair Kevin Warsh oversees his first meeting of the FOMC. Although the market
is not expecting any move in rates, the press conference will act as his public debut and give observers
their first meaningful opportunity to gain insights into his outlook. The current assumption is that Warsh
views the path to being able to eventually lower interest rates as being a reduced balance sheet in
combination with outsized gains in productivity fueled by AI, even as the market deals with inflation that
for now is stubbornly above the Fed’s target. U.S. equity markets went into this past weekend with
cautious optimism that a Memorandum of Understanding agreement could be finalized between the U.S.
and Iran. While a number of potential agreements have been floated in recent weeks, this was the first to
suggest a formal signing ceremony with V.P. Vance representing the U.S. However, midday Friday the
Iranians leaked details framing the agreement entirely as a list of U.S. concessions, drawing the ire of the
U.S, which fueled uncertainty about whether an agreement would be finalized over the weekend after all.
(Schwab)
