Market Overview
Last week saw a pronounced shift toward risk-on sentiment in global markets, driven largely by a softer-than-anticipated US CPI print and continued resilience in US macro data. Meanwhile, the Eurozone and UK recorded weaker forward-looking indicators, though their bond markets found near-term relief. Robust US growth and optimism around potential Federal Reserve rate cuts into an improving economy lifted equity indices, with the S&P 500, Nasdaq, and Dow all moving higher.
Key Macro and Policy Development:
US CPI and Growth - A weaker-than-expected CPI reading helped support the notion that inflationary pressures may be easing. This coincided with strong economic signals from data such as the Philadelphia Fed’s manufacturing index, which posted a sizable upside surprise. Markets now anticipate that the Fed may consider easing rates in 2025, despite official communications still pointing to caution given the economy’s robust pace.
Eurozone and UK Vulnerabilities - Growth indicators in both the Eurozone and the UK remain subdued, with UK economic data notably weak, pushing two-year gilt yields under a previously resilient threshold (4.42%). While UK bonds rallied on softer inflation and GDP figures, Bank of England officials maintain a watchful eye on volatile wage data and stubborn price pressures.
Digital Assets Break Out - Cryptocurrencies, led by Bitcoin, reacted to improving risk sentiment by breaking above shorter-term bearish channels. Bitcoin surpassed its previous intraday record, driven partly by speculation around crypto-friendly policy actions from the incoming Trump administration. Other digital assets like Ethereum and XRP also posted strong gains.
Market Reaction
Equities - In the US, Major indices climbed across the board, as technology shares outperformed following strong earnings and upbeat guidance. In Europe, STOXX 50 reached multi-decade highs, buttressed by solid corporate results and hopes that the US expansion could spill over. In Asia, China related equities rose on constructive US-China dialogue, while Japan’s market moved higher despite speculation of a near-term Bank of Japan rate hike.
Fixed Income - The US yield curve flattened as short-term yields remained anchored by expectations of a still-hawkish Fed, while long-term yields fell amid safe-haven flows. In Europe, softer growth data fueled a bond rally, with yields on gilts and German Bunds drifting lower.
Currencies - The US dollar saw choppy trading on evolving tariff headlines and uncertain Fed path. Even as the market priced in a potential 25bp hike in Japan, the yen weakened slightly against other majors, reflecting broad risk-on sentiment.
Commodities - After recent fund-driven rallies, key commodity segments like crude oil, copper, and natural gas retreated modestly on profit-taking. Aggregate net-long positions across 26 major futures remain elevated, raising the risk of further position squaring if sentiment shifts.
Risk appetite soared last week on the back of softer inflation readings and continued strength in US economic indicators. Nonetheless, ongoing fragilities in Europe and the UK, coupled with the uncertainty tied to the Trump administration’s early policy moves, suggest that volatility may resurface quickly. For now, investors appear poised to ride the wave of improved sentiment, particularly in equities and digital assets.