Risk Sentiment Rebounds Amid Sticky Inflation and Geopolitical Tensions
U.S. Markets Overview
U.S. equities finished higher in a holiday-shortened week rallying on a Friday after the Supreme Court overturned sweeping global tariffs. Nasdaq gained 1.51%, posting its first weekly gain since early January, while S&P MidCap 400 and S&P 500 Indexes advanced over 1%. The Dow Jones Industrial Average lagged, closing the week 0.25% higher.
Core PCE inflation accelerated to 3.0% year over year, reinforcing the Federal Reserve’s cautious stance. Minutes from the January meeting revealed division among policymakers, with some acknowledging the possibility of further rate increase if inflation remains persistent.
Economic growth lowered sharply in Q4 to 1.4% annualised, from 4.4% in Q3, while business activity fell to a 10-month low. Housing data was mixed, with builder confidence declining and pending home sales falling 0.8% in January.
In fixed income markets, Treasuries weakened amid hawkish undertones in Federal communications, while high yield bonds advanced alongside equities.
| Index | Friday’s Close | Week’s Change | % Change YTD |
| S&P 500 | 6,909.51 | 73.34 | 0.94% |
| Nasdaq Composite | 22,886.07 | 339.4 | -1.53% |
| DJIA | 49625.97 | 125.04 | 3.25% |
| S&P MidCap 400 | 3,606.95 | 43.5 | 9.13% |
| Russell 2000 | 2,663.78 | 17.08 | 7.33% |
Commodities
Energy markets were dominated by escalating U.S.-Iran tensions this week, with Brent crude rising ~5% on the week to $71 per barrel driven by a higher risk premium. The price increase reflects a geopolitical risk premium of $7-10/bbl, approaching levels seen during the 12-day conflict ($10-12/bbl).
Historical precedent shows risk premium can unwind rapidly once military action appears calibrated and diplomatic paths emerge. Should tension intensify, oil prices could surge to $100/bbl.
Europe
European equities reached new highs, supported by improving earnings expectations and diversification flows away from U.S. Technology-heavy market, with STOXX 600 hitting a record high, gaining 2.08% for the week. Among major market stock indexes, France’s CAC 40 rose 2.45% and Italy’s FTSE MIB climbed 2.29%. The UK’s FTSE 100 also reached a new peak mid week and added 2.29%.
While Eurozone industrial production fell by 1.4%, the forward looking PMI new orders index surged to a four-year high, signaling a potential turnaround in demand.
News reports speculating European Central Bank (ECB) President Christine Lagarde potentially stepping down early introduced a layer of political uncertainty. Meanwhile, UK inflation cooled 3.0%, paving way for a likely Bank of England rate cut in March.
Japan
Japanese markets faced headwinds from domestic growth concerns and geopolitical tension. The Nikkei 225 dipped 0.20%, and broader TOPIX fell 0.27%. On the domestic front, Q4 GDP grew at a meager 0.2% annualized, missing forecasts of 1.6%. Private consumption, the engine of the Japanese economy, cooled significantly.
Prime Minister Takaichi moved to reassure markets, pledging a “responsible and proactive” fiscal policy that balances capital investment with restraint. Consequently, the 10-year JGB yield fell to 2.10%.
Japan’s fall in economic growth and consumer inflation rising at the slowest pace in two years this January has weakened to the JPY 154 range from prior week’s JPY 152.7 level.
China
Mainland China markets were closed for the Lunar New Year holiday from February 16 to February 23, with trading set to resume on February 24. In Hong Kong, the exchange closed after a half-day session on February 16, and the Hang Seng Index fell 0.58% when trading resumed on Friday, reflecting a cautious tone toward China-related risk assets.
The IMF expects China’s economy to grow 4.5% in 2026, up 0.3 percentage points from October forecasts but below the 5.0% expansion in 2025. While China’s economy has been resilient, the old growth model faces constraints and a shift toward consumption-led growth is crucial, supported by stronger macro policy and structural reform.
China has released implementation details under its new VAT framework, including reclassifying certain telecom services and raising the applicable VAT rate to 9% from 6%. The Pentagon, though briefly, added several Chinese firms to a list tied to alleged military links, and withdrew minutes later without explanation. This episode reinforces policy unpredictability and may keep risk premiums elevated for large-cap Chinese tech, though no immediate penalties were announced.
Disclaimer
This report has been prepared for information purposes only. It is not intended to be, and should not be relied on for financial product advice, investment advice, legal advice, taxation advice or a recommendation. It does not take into account the objectives, financial situation or needs of any person. Before acting on any information in this report, consider its appropriateness and seek independent professional advice where necessary.
The information in this report is based on sources believed to be reliable at the time of publication, including third-party data, but no representation or warranty (express or implied) is made as to its accuracy, completeness or timeliness. Market prices, statistics and commentary are subject to change without notice. Past performance is not a reliable indicator of future performance. Any forward-looking statements are subject to risks and uncertainties and actual outcomes may differ materially.
To the extent permitted by law, the author and any related parties disclaim all liability for any loss or damage arising from reliance on this report. This report is not an offer, invitation or solicitation to buy or sell any financial products or to enter into any transaction. This report may not be reproduced, redistributed or disclosed (in whole or in part) without prior written permission.
