The week ahead: Stocks extend recovery

The recovery in risk sentiment has persisted as we start a new week, gold and silver are both higher and the Nikkei reached a fresh record high after PM Takaichi won a resounding  victory in her election gamble. This has boosted the mood for stock markets around the world, Asian stocks hit records, and both US and European futures are pointing to a positive open later today.

The global risk rally persists

It’s not only tech stocks that are recovering, participation in the latest stock market rally is broadening out. The Dow Jones hit a record on  Friday above 50,000 and is extending gains today. Solid gains are also expected at the open across Europe, as the stock market rally remains global and not just US-centric.

At the start of this week, all eyes are on Japan, after Prime Minister Takaichi secured an historic victory in the snap elections held on Sunday. Her party has secured a two-thirds super-majority in parliament and has secured the largest number of representatives in  the lower house for a single party since the Second World War.

Takaichi the untouchable, but will the bond market support her?

Takaichi’s election bet has paid off, and she now has a clear mandate to pursue her agenda, which could have market ramifications. All eyes are on the bond market. Takaichi, like Andy Burnham, is not in hock to the bond market. She has threatened to cut taxes and boost spending even though Japan’s debt to GDP ratio is 250%.

The yen on pause for now as we wait to see how fiscally expansive new government plans to be  

Japan’s stock market has been one of the top performers in the developed world so far in 2026, while its bond market has been a major under performer, as bond investors fret about more bond issuance and surging government debt under Takaichi. The forex market has also been impacted by this political force of nature. Takaichi has said in the past that she favours a weaker yen, and this is one reason why US and Japanese authorities reportedly stepped in to the forex market last month to stem the yen’s decline after USD/JPY surged towards 160. Now that Takaichi is politically untouchable, we may see the yen fall once again. However, the yen is the second strongest currency in the G10 FX space on Monday, which suggests that the market was already priced for the election result, and we may need to understand which policies she will pursue before the yen reacts.

The Takaichi trade is back on

The Japanese stock market reached a record high on the back of the election result, which suggests that the ‘Takaichi trade’ is back on. However, this trade also means bonds are selling off. Japanese bond yields are higher by 6bps so far on Monday. This is a moderate gain, but her fiscal policies could trigger nervousness in the bond market, and it is worth watching Japanese yields, especially if rising yields cause the yen to sell off.  Ultimately, bond investors need to balance Takaichi’s election pledges to temporarily cut the food tax, with a new era of predictability in Japanese government and stability in policy, which could be seen as positive for bonds.

Tricky waters for Starmer, could weigh on bond market

The UK bond market will also be in focus this morning, after the Prime Minister’s second chief of staff resigned, this time over his links to Peter Mandelson’s appointment as the US ambassador. There is a real risk that a Labour coup could see Starmer toppled in the coming days. This is likely to be an unsettling time for UK bond investors, as any successor could push UK economic policy further to the left, which may trigger a selloff in UK debt. In the past month, a political risk premium has been added to UK long-end debt, and the 10-year Gilt is the worst performer in Europe and is underperforming the US. This is also weighing on the pound, which was the third weakest performer in the G10 FX space last week. We expect this pattern to continue if bond yields spike.

Will AI fears continue to weigh on markets?

February is proving to be a choppy month for financial markets. Investor stress has run high in recent days, even though sentiment turned around on Friday and the S&P 500 posted its largest daily gain since May.

After days of volatile trading, the question now is whether it will continue. Theren continues to be an existential fear about AI. AI has made rapid progress in recent months, and last week two tools released by Anthropic sparked fears that they would lead to the demise of countless businesses and sectors. Some of this fear is overdone, for example, the software sector on the S&P 500 is down nearly 30% since its peak in late October and is at its lowest level since April last year. However, there is little fundamental evidence that AI is threatening profitability at the world’s largest software companies, and analysts expect earnings to remain strong.

However, the radius of companies that investors are worried about regarding AI disruption is growing, and this could cause long term problems for the stock market. Although stock prices staged a strong recovery on Friday,  it did not heal all of the damage that had already been done. For example, the financial sector of the Nasdaq fell 3.5% last week, and there were double-digit losses for PayPal, FactSet research, News Corp and S&P Global, as the market worried about the future of their business models now that powerful AI tools have been unleashed on the market. Not all the companies that have struggled recently, including Salesforce, Applovin and PayPal, will see permanent damage to their business models due to AI, as you would expect that most will adopt AI tools and benefit from the productivity gains, however, some will die.

S&P 500 software index

Source: XTB and Bloomberg

AI trade shifts from winners to losers

In recent years, the AI trade has been about the winners from AI. For example, hardware makers like Nvidia. Also, investors did not look at a granular level how AI would impact the global economy. That is changing and the focus is now shifting to the losers in an AI world. This is causing confusion, as it is still tricky to predict who the winners and losers will be. This is why fear is manifesting itself as bouts of stock market selling, as uncertainty takes hold.

The changing trading pattern of retail investors

In recent years, retail traders have been net buyers of stocks when markets have dipped. However, although retail traders remain net long equities after a record inflow into equity funds in 2025, since the start of February there have been signs that retail traders are not so eager to buy the dip when stock markets come under pressure. For two days last week, the retail community sold $690mn in US stocks, suggesting that the relentless dip-buying of 2025 could be slowing down. This is particularly acute for crypto linked stocks. This suggests a change in global trading patterns, which could make markets more volatile, especially if the retail trading community is not there to act as a floor to any market selloff.

Can Bitcoin boost risk sentiment once again?

We will be watching to see if the rise in Bitcoin over the weekend eases retail traders’ fears to continue to be the buyer of last resort for the market. Bitcoin is higher by more than $7,000 in recent days, after dipping to a low of $63,000 last week, it is now back above $70,000. This is still well below its peak from last year, but it may ease some fears about the sell-off. The tight link between bitcoin and tech stocks, especially AI-linked stocks, is likely to persist, so where crypto goes, we should expect AI stocks to follow.

Two paths for the week ahead

As we start a new week, there are two trails of thought. The first is offered by Goldman Sachs’ analysts. They are predicting more selling pressure this week on the back of algorithms selling into the recent decline in stocks. Although the S&P 500 rose back above its 50-day sma, they see continued selling interest, which could push the S&P 500 back to 6,700, the December low.

Silver recovery reaches important milestone

However, on the other hand, there are reasons to be positive. Geopolitical tensions are reduced. Talks between Iran and the US have been positive so far, and Polymarket is now predicting a 40% chance that the US will strike Iran by the end of March, which is well below the peak. This could reduce near-term spikes in the oil price. Added to this, the shake-out in gold and silver that we have seen in recent weeks could be at an end, especially now that silver has broken above its 50-day sma at $77.85. This suggests that short term momentum is to the upside.

Silver

Source: XTB and Bloomberg

Added to this, market breadth has improved and some sectors of the market now have more attractive valuations, as stocks have sold off even though earnings forecasts remain strong. For example, Microsoft now has a P/E ratio that is below that of the S&P 500 at 26 times earnings, even though analysts expect the company to generate $81.3bn in revenue for the current quarter.

The advancers/ decliners index is rising for the S&P 500 and the total number of S&P 500 companies that are trading above their 50-day moving average is 68.5%, which is above the long-term median. This suggests that concentration risk is now less of a problem for US stock indices, which could be enticing for investors.

Ahead this week, highlights include a blockbuster week for US economic data, and the UK will release Q4 GDP on the 12^th Feb.

US data bonanza 

This week will see the delayed release of US economic data caused by the mini shutdown of the US Federal government. We will get payrolls, CPI and retail sales, which are the most market moving data releases of note. The worst-case scenario for risk sentiment is weak hiring and a weak consumer alongside higher-than-expected inflation.

The payrolls report for January will be the highlight, as we also get the benchmark payrolls revisions. The revisions data could lower the March 2025 payrolls data by 863k jobs, which would suggest several months of negative payrolls in 2025, and would paint a much darker picture of the US labour market.

There are currently just over 2 rate cuts expected for this year, this could be recalibrated higher, if this week’s data suggests that the labour market is weaker than originally thought. Annual and core inflation is expected to moderate slightly to 2.5% for January. However, the risks are to the upside, as January tends to see hotter inflation due to seasonal price increase.

UK GDP slowdown expected as Downing Street drama remains the focus

Analysts are expecting a lackluster GDP report for the UK for Q4. Expectations are for growth to have expanded 0.2% on the quarter, with a 1.2% growth rate for last year. The Q4 period covers the lead-up to the UK budget, which weighed heavily on confidence, and is likely to have impacted on these figures.

Exports are expected to have fallen for the quarter, suggesting that the UK’s trade deal with the US is yet to reap material benefits. Personal consumption is expected to slow to a 0.2% rate, while government spending is expected to have risen last quarter by 0.5%. So much for fiscal stability and securenonics by Labour.

The GDP data may not have a material impact on UK asset prices after signs of strength in the survey data in recent weeks. Added to this, drama at Downing Street is likely to be a bigger driver of UK bonds and the pound in  the short term, and GBP/USD has lost the $1.36 handle at the start of the week, although early losses on Monday remain moderate so far, suggesting that political risk, for now, is having a minimal impact on price action.