The tech rally is showing signs of fatigue, supporting rotation trades

The year may have begun with ongoing trade tensions and fresh geopolitical uncertainties, questions around the legitimacy of Trump’s actions — both on trade and geopolitical fronts — and persisting doubts over AI valuations, but none of this has been enough to prevent the bulls from pushing toward fresh records. The S&P 500 printed its first record high of the year — likely the first of another long series — the Dow Jones marked its second record high, and the Nasdaq advanced nearly 1% after dipping below its 50-DMA a few sessions ago.

In the aftermath of the Venezuelan operation, the market’s reaction has been largely muted — and even positive for a handful of sectors, including oil, defense stocks, rare earth metals (on potential retaliation risks from China), Bitcoin (amid speculation around a 600,000+ BTC shadow reserve Venezuela is believed to be sitting on), and precious metals. Importantly, flows into the latter appear to go beyond pure safe-haven demand, as investors showed little stress over Maduro’s capture.

What’s next? While the immediate Venezuelan risk may now be behind us, the message is clear: the US is unlikely to stop here. Relations with NATO and Europe are already under strain over Greenland, which strengthens the case for maintaining — and even increasing — exposure to defense stocks. The STOXX Europe Aerospace & Defense ETF kicked off the year with a 7% jump, and there is likely more upside ahead.

Metals — precious and industrial — also remain firmly in focus. Silver is seeing large fluctuations around the $80 mark, with the rally exacerbated by China’s decision to restrict silver exports, in a similar fashion to rare earth metals. This policy took effect on January 1. From now on, each silver shipment requires government approval, and only large, state-approved companies meeting high production and compliance thresholds are allowed to export. Estimates suggest this could potentially halve China’s export capacity, removing 4’500–5’000 tonnes from annual global supply — a meaningful amount given persistent supply deficits. Because Chinese refined silver represents a large share of globally tradable supply, these restrictions tighten the global pipeline and amplify volatility. The silver market is therefore facing a structural supply squeeze, which should, in theory, continue to support prices.

Copper also hit a record high on Comex on Tuesday, driven by a different type of supply shock. A rush to ship copper into the US ahead of potential tariffs is draining supply elsewhere, leaving a hole in the global market and pushing prices higher — on top of an already constructive backdrop of strong demand and limited supply growth. Copper, too, remains one of the hottest trades at the moment and still has room to extend gains. In both cases, US dollar softness is providing additional support to the bulls.

The main risk here is that once tariff front-running fades, some of that supply dislocation could unwind — or that a sharp rebound in the US dollar could take some heat out of the move.

Speaking of the US dollar, the greenback reversed Asian losses yesterday and closed the session on a bullish note. It is lower again in Asia this morning, highlighting a lack of directional consensus between Eastern and Western trading hours. In the absence of a major macro catalyst, part of yesterday’s move likely reflected softer-than-expected inflation and PMI data. The European Central Bank (ECB) appears to have gained control over inflation, with aggregate CPI expected to have slowed to around 2% in December (final data due this morning). From here, any further slowdown in economic growth could revive the need for additional support, and easing price pressures would give the ECB more room to act. This dynamic pushed the EURUSD below the 1.17 mark yesterday, where the pair is currently consolidating.

In Australia, inflation also fell to a three-month low, yet the AUDUSD is rising nonetheless, supported by firm metal and energy prices that continue to attract capital inflows.

Elsewhere, tech appetite is weaker in Asia this morning. Memory-chip makers are pulling back after strong gains in the first few sessions of the year, the Korean Kospi is giving back early advances, and SoftBank is down around 1.5%. The move follows Nvidia’s failure to reignite investor enthusiasm at CES, despite Nvidia’s CEO Jensen Huang announcing that its Rubin chips are nearing shipment, the CFO improving its bullish revenue outlook on strong demand, and the company unveiling its Alpamayo platform — a push into physical AI that opens new revenue avenues. Alas, investors remain focused on stretched valuations, heavy leverage and the circular nature of AI-related deals. xAI has just closed a $20bn funding round, with Nvidia among the backers.

It increasingly feels like good news is no longer generating the same euphoria seen over the past three years. The tech rally is showing signs of fatigue, supporting rotation trades — a trend further reinforced by geopolitical headlines. Tech-light European and UK indices have started the year outperforming their tech-heavy US peers, with scope for further catch-up given lower valuations and their more cyclical exposure.

Zooming out, the macro backdrop remains supportive for equities (particularly cyclicals). The Federal Reserve (Fed) is expected to cut rates several times this year, while falling inflation elsewhere continues to strengthen the hand of central-bank doves globally.

This week, the US will release its latest jobs data, with the ADP report today expected to show fewer than 50k job additions last month. A weakening labour market has been a key factor behind the Fed’s willingness to look past inflation risks and refocus on employment. The US 2-year yield remains below the 3.50% mark, and Fed funds futures currently price roughly a 50-50 chance of a March rate cut.

Further weakness in labour data would reinforce this narrative and support rate-cut expectations, while stronger-than-expected figures could quickly revive the hawks.

But, but, but... It is worth noting that the inflation leg of US data remains blurred, as recent releases were distorted by statistical issues and failed to provide a clear signal on underlying price dynamics. The fact that inflation is easing elsewhere has given investors some reassurance that US price pressures are also likely under control, allowing the Fed to focus on jobs. However, should inflation unexpectedly re-accelerate, rate-cut expectations could be rapidly repriced.