What Happened Last Week
- Tariffs: Markets welcomed Trump’s tariff delay, but skepticism raises the risk of more aggressive action down the line.
- Markets: Optimism over a Ukraine peace deal and German elections fueled a sharp rally in international stocks.
- Inflation & Fed: Powell downplayed the hot CPI data, but weak retail sales and small business sentiment added to economic uncertainty.
What We’re Watching This Week
Europe: German elections this weekend, a potential Russia-Ukraine peace deal, and ongoing tariff talks are the focus this week.
Business Surveys: After weak U.S. small business data, markets look to Friday’s PMI reports for near-term growth signals.
Trade Policy: Investors await the Trump-Xi call and possible EU tariff implementation on February 18.
Investment Management Team’s Views
Investors cheered positive tariff news as Trump delayed broader action to April. Markets have a very short attention span for complicated negotiations and policy implementation, and all the back and forth on trade is leading many to view Trump’s rhetoric as empty. We think he is serious about reforming the global trade environment, and would point out that, from a game-theoretical point of view, if markets ignore this risk today it increases the odds of future escalation to improve his bargaining position. Beyond the rosy view on tariffs, optimism is also rising on a Ukraine peace deal and a pro-growth German election outcome. As a result, international stocks are surging — European equities have had their best start to a year since before Y2K was a thing. Emerging markets also got a boost from a strong rally in Chinese stocks as investors continue to process positive developments, like Alibaba’s announced collaboration with Apple for on-device AI and better-than-feared tariff policies. The S&P 500 had a strong week, closing near the 6100 post-election resistance levels. Small-caps, flat since the election, lagged despite a fall in Treasury yields.
Elevated rate volatility has weighed on small-caps recently, and last week was no exception. A hot January CPI print indicated stalled progress on inflation, but Fed Chair Powell downplayed it in his Congressional testimony, easing bond market nerves. Weak retail sales and falling small business sentiment added to the economic uncertainty. Zooming out a bit, with the Fed on hold, investors face the challenge of balancing tariff risks against a favorable deregulatory agenda. In our view, the path ahead looks choppier compared to the strongly trending markets of the past two years.
This week is relatively light for known market catalysts. Investors await the Trump-Xi phone call and possible EU tariffs on February 18, as trade uncertainties linger amid ongoing diplomatic tensions. After weak U.S. small business data, Friday’s Purchasing Managers’ Index (PMI) reports will provide key growth signals. In Europe, policy optimism remains elevated despite the strong equity rally. Heightened expectations and investor short-covering in Europe provide an interesting set-up into the German Federal elections as well as the ongoing Russia-Ukraine peace talks.
