Market update

It’s been an interesting week for risk assets. Below we give our thoughts on the key themes that are driving price action right now:  

Geopolitics: The prospect of peace between Ukraine and Russia triggered a risk rally earlier this week, especially for European equities, which enjoyed a broad rally. Enthusiasm has stalled at the end of the week as the reality of how complex the situation is hits home and knocks animal spirits. This is not going to be a quick and neat resolution from here, and the boost to markets may not last.

Political shifts: The euro is extending gains at the end of the week, and EUR/USD is back above $1.05, even though Vice President JD Vance delivered a speech at the Munich Security Conference that lambasted European leaders for trying to silence the far-right parties. He also played down concerns about Russian electoral interference in Europe. However, for traders, at the end of a long week, the rally in the euro and the record high for the Eurotoxx 50 could be relief that Vance did not mention tariffs and stuck to politics. This week could prove a turning point in 2025, as the moment when traders stopped reacting to every speech and tweet from the new US administration.

Tariffs: This has been the overarching theme for financial markets for February. The next iteration is reciprocal tariffs, and tariffs for what the US deems unfair practices. This will be decided on a country-by-country basis and may be decided by April 1st. Tariffs have got more complex and difficult to implement this week, which is why the market has been willing to look through the tariff talk. The dollar has fallen sharply vs. the G10 FX space, GBP/USD is up 2% so far this week, and EUR/USD is higher by 1.8%. If tariffs are less important for market movements, then we should expect to see a longer-term breakdown in the USD. Thus, there could be more room for the G10 FX space and EM currencies to recover vs. the USD in the coming weeks.

Earnings: Although there are some index level drivers for stocks markets, for example, the prospect of peace in Ukraine, markets are mostly moving on the back of individual factors like earnings. This is on show in the FTSE 100, which is a laggard in the European equity space this week. The weakest performers in the FTSE 100 include NatWest, Diageo and Unilever, who all reported results in recent days. Diageo reported weak results last week, Unilever saw its share price dive by 7% on Thursday, after it said it would spin out its ice-cream unit and it delivered weak forward guidance. NatWest reported stronger than expected earnings, however, it is facing a criminal lawsuit over the debanking scandal with Nigel Farage, and its share price is lower by more than 3% on Friday. Investors are intolerant of earnings misses, and stocks are getting punished if their earnings reports are not perfect.

China tech stocks: Chinese shares have been boosted by DeepSeek that confirmed China’s ability to do more with less, and to quietly become a force in the AI landscape. The Golden Dargon Index, an index of US listed Chinese tech firms, has outperformed the Nasdaq Composite index this week for the first time since September, as China’s tech stocks get their moment in the sun.

US economic data has been mixed this week: CPI was worse than expected, yet retail sales were extremely weak, as the LA fires hit consumption last month. This has caused some volatility in US interest rate expectations. The hot CPI report triggered a pricing out of a second rate cut from the Fed this year, however, after the retail sales report there is now 1.7 rate cuts priced in for the US this year. On Thursday the market expected US interest rates to end the year at 3.99%, this is now 3.92%. Earlier this week there was a small chance of a rate hike priced in for the Fed by year end. After the weaker retail sales, this chance has been priced out. This highlights how sensitive interest rate markets are to monthly economic data reports, and we expect this to continue.

The Dollar: We think that we could be at the begging of a dollar weakening cycle, which could see the pound and the euro play catch up after a weak few months for both currencies. This could keep upward pressure on commodities, and the oil price is ending the week on a high. The gold price is weaker, as demand for safe havens take a knock on the back of the start of negotiations between Ukraine and Russia.