Weekly Market Recap

It is not unusual for out of favour areas to rebound quickly, this is the so-called ‘pain trade’, whereby the market seems prone to perform in a way that causes the maximum pain to the most people. This is why looking at investor positioning is particularly important. But the last few years seem to have experienced particularly abrupt waves of anxiety and euphoria.

Another factor explaining the ‘pain trade’ is changes in market structure: the rise of retail investors, more passive investors, and increased use of thematic investments create pools of money which then ebb and flow, seemingly on vague narratives.

And then there are coincidental factors, increasing tensions over Iran which have contributed to a rising oil price. But still, uncertainty over the effect AI will have on the market for stocks, products, and people is vast.

OECD data shows economists are broadly bullish on AI’s productivity impact, McKinsey projects annual gains of 3.4% in optimistic scenarios.

Yet we face a paradox: despite two years of U.S. productivity acceleration, growth remains modest and far below the internet boom era.

This gap reflects the ‘Solow Paradox’, innovations often take years to show up in official statistics due to adoption costs, learning curves, and implementation delays. The high productivity growth in the internet boom was coincidental, reflecting benefits from the 1990s growth of personal computers, office applications, and globalisation, rather than the rudimentary websites, which were just starting to generate revenues (and not profits).

However, it seems the AI benefits have arrived earlier than previous innovative waves and early market signals suggest they are already having real impact. Jobs data shows early career hiring collapsing in AI-exposed roles (software developers, customer service), and employer surveys reveal 32% expect workforce reductions from AI, double those expecting growth.

The tension is clear: markets expect major disruption, but productivity gains have not yet materialised at scale.

RELX results highlight the controversy

A company which was in the crosshairs and reported earnings last week was RELX.

The company reflects the market psychosis perfectly: an AI beneficiary a year ago, it has lately been seen as an AI loser, despite no change in operational performance or strategy. The broad potential AI benefits stem from automating certain workflows, many of which RELX facilitates and where hundreds of software companies compete, but RELX is positioned upstream of this disruption.

RELX controls the proprietary content and data that makes AI tools more valuable, not less. Their algorithms that have accumulated over decades, judgements, and interpretations are embedded into their 300+ specialised workflow tools. Its tool Protégé, for example, is distributed through twenty-five partner platforms like Harvey AI. It already runs on Claude, so if Claude gets better, Protégé gets better. RELX doesn’t compete in the crowded workflow software market; it enables it.

This is crucial. As AI drives productivity by automating repetitive tasks across law, publishing, and scientific research, demand for expert-curated, proprietary content increases. Large law firms using 100+ software tools still need RELX’s specialised data and judgement layers to make those workflows meaningful and defensible.

So, although Google’s search was initially seen as being disrupted by AI, instead Google search is now seen as an enabler of Google’s Gemini AI model. And just as DeepSeek was seen as a threat to AI model and hardware providers, instead it’s an enabler of greater use of AI.

The pace of change is extraordinary, and the uncertainty is high, but the market missteps will be many. Companies solving this productivity challenge need trustworthy, specialised content and interpretations that AI cannot easily replicate. So, companies like RELX should be attractive with 90% proprietary data accumulated and domain expertise giving them a moat as essential infrastructure for the AI productivity transformation, not victims of it.

Politics give and take from markets

There were some interesting political happenings last week which impacted markets. The least directly impactful was the House of Representatives (the House) joint resolution ending the emergency tariffs on Canada. It’s not directly impactful because nothing will come of it. The bill will likely be passed by the Senate and will then go to the president’s desk, where it will be vetoed.

The President can veto any piece of legislation coming from Congress. However, Congress can force the legislation through if it obtains a two thirds super majority. There is no real prospect of that happening because the vote was largely along party lines and only managed to narrowly pass because six Republicans joined with the Democrats in an afront to the president.

These acts of self-harm with the ruling party are unhelpful in a mid-term year, but they reflect the way in which tariffs are unpopular in specific districts, something which will be reflected in November when the full House and a third of the Senate are up for election.

Currently there is an estimated 84% chance that the Republicans lose the House to the Democrats, but the margin of loss matters, creating a huge incentive to keep the economy strong in this election year.

Japanese Prime Minister Sanae Takaichi enjoyed a much easier ride as her Liberal Democratic Party (LDP) and its coalition partner, the Japan Innovation Party (Ishin), achieved a strong victory in the lower house election with LDP alone securing the two-thirds supermajority. This allows them to override the upper house and initiate constitutional amendments.

Markets reacted positively to the election results with equities and the yen both rising. The two key pillars of Takaichinomics are: new measures against rising prices and strategic investment in select sectors.

Areas they expect to benefit under the strong LDP mandate include defence, AI semiconductors, and nuclear energy. Consumer stocks should also benefit as private consumption potentially improves as the government weighs in on inflation.

The UK leadership crisis

In the UK, the last fortnight has seen some volatility in gilts, which is due to the fragility of Prime Minister Sir Kier Starmer’s leadership.

There has been scandal surrounding his appointment of Peter Mandelson as ambassador to the U.S. The revelations, which centre around Mandelson’s links to Jeffrey Epstein, and leaks of sensitive government information, rattled sterling and gilt yields due to concerns a new Labour prime minister might increase fiscal spending. Though markets have retraced these moves, political risk remains elevated, and the Prime Minister’s position is precarious.

A leadership contest could still materialise following local elections in May, potentially reigniting volatility. Prediction markets still believe there is a high chance that the UK will have a new Prime Minister by the end of this year, and financial markets would prefer it to be Wes Streeting rather than Angela Rayner, who comes from the left of the party. But either option could be seen as a positive if the current financial framework remained and was adhered to, so the decision on whether to change the Chancellor and if so who to, would be the key decision.

Coming up – 17 February 2026 to 23 February 2026

Metals in focus:

Earnings results from Rio, BHP and Glencore will be in focus with commodities having been a strong performer until recently.

UK data:

Inflation data will inform the outlook for interest rates and house prices may underline the turnaround being seen in central London property after an uncharacteristically weak period.

The Munich Security Conference:

With defence spending a major political focus for countries outside the U.S. and the future of NATO seemingly always being pondered, the conference has tended to be a catalyst for such discussion.

The start of 2026 remains chaotic. Not all the disorder stems from government, but some does; specifically, the controversy over U.S. Immigration and Customs Enforcement (ICE) agents causing fatalities.

This has seen U.S. Congress deny funding to the Department of Homeland Security (DHS), which funds ICE. A compromise has been reached but it will be short lived, with the DHS funding due to expire on 13 February.

The compromise came too late for some of last week’s anticipated jobs data releases, which have been delayed as a result. It is a shame, because jobs growth has been slowing this year, and the interest rate outlook is uncertain. Compounding concerns, the week saw a further step up in the anxiety investors are feeling over the effects of AI on companies and workers.

However, some jobs data was released last week, including the Challenger Report, which summarises job cut announcements. The report showed an increase in U.S. job cuts.

There have been various reasons for layoffs over the last year, a lot of which related to federal spending cuts under Elon Musk’s Department of Government Efficiency (DOGE). But technology job losses, specifically in software, have been a regular feature.

It may seem ironic that the technology sector can bear the brunt of technological advances, but digital industries remain the most vulnerable to digital disruption. The Challenger Report has been tracking how many job losses are associated with AI, but the numbers have been comfortingly small. Since 2023, AI has been cited as the reason for just 3% of layoffs, although it is likely job losses in other categories are at least partly enabled by AI.

The lack of hard jobs data came as Anthropic, one of the four main foundational AI models, released a series of products designed to deliver efficiencies in various industries. A document review and analysis plugin for legal documents was interpreted as a threat to existing legal data services from RELX and Thomson Reuters. 

The new plugin overlaps significantly with some review and drafting workflows but doesn’t seem to disrupt the companies’ crown jewel assets, their validated data sources.

The AI disruption features many waves of anxiety

Similar stresses were seen in software, which saw sharp share class declines over fears that AI could replace many applications. The controversy investors are struggling with is whether AI is a tool for the software industry or an existential threat.

Early evidence suggests the former and was validated to some extent by comments from Sundar Pichai, CEO of Alphabet. He pointed out that 19 of the top 20 Software as a Service (SAAS) firms were using Gemini (Alphabet’s AI model).

Either way, this seems like good news for Alphabet, but the stock sold off last week despite delivering record profits and performing strongly on most metrics. Amazon’s results were also good but were received even more poorly.

The anxiety for both companies seems to be related to plans for capital investment. While the investment still seems to be supported by demand and therefore does not echo the speculative investment of the technology, media and telecommunications (TMT) bubble era.

It nevertheless represents an increase in capital intensity for the hyperscalers, which will depress profitability going forwards. What investors do not know right now is whether that increase in costs will be justified by even greater increases in revenue.

It is worth remembering that this time a year ago, the release of the Deep Seek large language model, which seemed much more efficient than the existing foundational models, caused significant sell-offs in AI hardware providers (such as Nvidia).

A year before that, AI was seen as an existential threat to Google’s search business. Since then, Google has emerged as one of the greatest beneficiaries of AI.

Looking back, those times represented attractive investment opportunities. The same could well be true for software and legal data companies today. The bigger question is what it would take for the market to regain confidence in the value of these businesses, just like it was able to do for the hardware companies and Alphabet itself.

Coming up – 11 February 2026 to 16 February 2026

Jobs update: 

The delayed U.S. jobs report will arrive.

Inflation update: 

U.S. inflation will be reported on Friday.

A few weeks ago, we discussed Kevin Hassett, who President Donald Trump was strongly hinting would be his nominee for Fed chair. That is now history. Instead, the President has nominated former Fed Governor Kevin Warsh. The question is, does this have implications for investments?

We know that President Trump is anxious to replace Jerome Powell as Fed chair because he wants interest rates to be lower. That aligns with the recent commentary Kevin Warsh has been providing, in which he too suggests that interest rates are too high and are disadvantaging small businesses.

This sounds as if it aligns with President Trump’s ‘man of the people’ instincts, but Warsh’s views still seem to clash with those of the President, and to a surprising extent.

Warsh says “[the Fed] should abandon the dogma that inflation is caused when the economy grows too much and workers get paid too much. Inflation is caused when government spends too much and prints too much.”

President Trump has been explicit about wanting lower interest rates to support the housing market, but also to lower the federal interest expense. This is a concept called fiscal dominance, which means setting interest rate policy to ease fiscal challenges rather than moderate inflation, and it seems like one Kevin Warsh would struggle to find peace with.

Warsh emphasises the role of credibility, which he says Powell has undermined through the use of the Fed balance sheet during lockdown. He accuses the Fed of prioritising Wall Street over Main Street (the financial sector over more traditional businesses).

As such, he has been advocating reducing the balance sheet (selling the bonds the Fed holds to justify cutting interest rates, which he says would support Main Street over Wall Street).

Warsh has also stated that he believes the dollar’s role as a reserve currency brings benefits to the U.S. There was quite a market reaction to this because it seems so at odds with the rhetoric and actions that have come from the Trump administration. The idea of shrinking the Fed balance sheet would seem set to put upward pressure on bond yields and mortgage rates and make longer-term borrowing more expensive.

Some within the Trump administration have wanted a weaker dollar to support the manufacturing industry – Kevin Warsh doesn’t seem to advocate that.

Despite the preference for lower interest rates, Kevin Warsh seems quite an austere choice for a president who wants to use interest rates to reduce the federal interest expense.

Understandably, the rumour caused quite sharp reversals in the gold and silver markets, which had been performing extremely well. Gold rose from below USD 4,000 per troy ounce as recently as November, briefly touching USD 5,600 on an intraday basis before dipping back towards USD 5,000.

Treasury yields rose as the news was digested and the dollar, which had been in freefall, began to rise.

These moves seem quite rational. Appointing a generally hawkish advocate of a strong dollar as Fed chairman weakens the evidence that the dollar is going to be debased over time, and that monetary policy will be used to suppress interest rates to help fund the deficit. What it doesn’t do is reduce the budget deficit or the volume of new bonds the federal government must issue. Nor does it offer an alternative way for managing the growing debt burden. And while the appointment may shift expectations around monetary policy, it seems unlikely to signal any change in President Trump’s continued desire for lower interest rates to ease the federal government’s interest bill.

Coming up – 3 February 2026 to 9 February 2026

Earnings season continues:

Alphabet and Amazon will be amongst the companies reporting this week.

U.S. jobs data:

A modest 78,000 new jobs were estimated to have been created during January.

Busy doing nothing:

The European Central Bank and Bank of England are both expected to keep rates on hold when they meet on Thursday.

Equity markets struggled last week, rocked by a news flow that at times had somewhat ominous overtones, even if the fundamental and tangible drivers of equity performance still seem to be in place.

The ominous news flow predictably came from U.S. President Donald Trump. As he prepared to attend the World Economic Forum in Davos, his rhetoric over Greenland suggested little room for compromise and a determination to take sovereignty over the region from NATO ally Denmark.

In response, some NATO members planned exercises in the region. This prompted the president to declare that they would be punished by tariffs beginning in February, increasing in June and staying in place until America’s acquisition of Greenland has been completed.

With their usual dispassionate approach to foreign affairs, markets were little moved by threats to Greenland’s sovereignty, but they were concerned about the possibility of tariffs. Equities were weaker, the dollar fell, and bond yields rose. Gold remains one of the few asset classes to benefit from this news.

Following the ‘Liberation Day’ tariffs, countries have generally been reluctant to impose retaliatory tariffs on the U.S., partly because those with balance of payments surpluses with the U.S. would appear to have more to lose from a trade war. 

This latest tariff threat created an additional challenge, U.S. tariffs were only imposed on eight countries participating in NATO exercises, but retaliation would need to come from the European Union as a whole. Dragging a lot of countries into a trade war that has the scope to escalate further would test the unity of the Eurozone.

Could an alternative be for Europeans to sell their holdings of U.S. treasuries? 

Europe as a region is believed to hold around 12% of U.S. treasuries, the sale of which would put upward pressure on U.S. borrowing costs.

The complication is that many of those bonds are private sector holdings and are therefore outside the control of the state. Mobilising them to sell would be nearly impossible. Many may be beneficially owned by stakeholders outside Europe anyway. 

For most, the decision to hold them reflects the liquidity that only the treasury market can offer, or a need to hold U.S. assets to avoid losing currency competitiveness against the U.S. The desire to hold less treasuries is powerful and explains part of the rise in gold as an alternative home.

Returning to the topic of Davos, this has typically been a forum in which countries and business leaders find ways to help each other. President Trump’s involvement has been to shift the narrative to one of greater self-sufficiency and self-interest. It is an uncomfortable message for those who are not part of the world’s largest economy, but it is one that was taken head on by Canadian Prime Minister Mark Carney. 

He talked about the need for middle countries to accept that the old global rules-based order is no more, and that middle power countries like Canada, the UK and the EU states finding flexible alliances will be the way to avoid subordination to the global superpowers.

It is a stark but compelling reality, which RBC Chief Executive Officer Dave McKay was asked to expand upon at the Forum.

As the week progressed, a tentative de-escalation was brokered by NATO Secretary Mark Rutte. It sounded as if President Trump would be willing to drop his demand for Greenland’s sovereignty in exchange for military access. 

It is understood that some access to Greenland’s mineral wealth would also be afforded. Greenland holds significant deposits of rare earth elements. However, Helima Croft, RBC’s Head of Commodity Strategy, believes they’re remote, ice-covered and expensive to access.

The debate over Greenland forms a further evolution of the ‘Worlds Apart’ theme, which RBC Wealth Management identified three years ago. What began as a rupture in trade seems to be becoming broader and more fundamental with each month that passes. 

It discourages investors from holding U.S. assets, even if only at the margin, and has contributed towards the weakness of the dollar and the rise in the gold price. As such, it contributes to an overlapping theme of debasement, which is more substantially represented by the U.S.’s reluctance to address its unrepentant government borrowing.

Rising government debt has been a concern for many industrialised countries, but the U.S. is certainly a stand-out because under both the Republicans and Democrats, the forecast public finances have been allowed to worsen.

UK sees retail sales boost

In the UK, by contrast, last week saw some good news on the public finances.

The fiscal position is stretched in the UK. However, governments do take tough actions based on recommendations by the independent fiscal watchdog and will take some comfort that borrowing has increased more slowly than expected.

In other UK news, retail sales expanded on a seasonally adjusted basis and some aspects of consumer sentiment improved. It does seem as if UK consumers held back spending due to concerns over the prospect of tax hikes in the Autumn Budget, but they may now feel confident to indulge a little more. Recent interest rate cuts will also help.

Coming up – 27 January 2026 to 2 February 2026

Tech earnings: 

We will find out how four of the ‘Magnificent Seven’ (Meta, Microsoft, Tesla and Apple) performed in the final quarter of last year.

U.S. interest rate decisions: 

The Federal Reserve will likely leave interest rates on hold, but the voting will be interesting.

Trump’s tariffs: 

Will the U.S. Supreme Court issue its opinion on the legality of President Trump’s tariffs?

For another week, U.S. President Donald Trump’s rhetoric dominated the news, with some headlines explicitly moving markets while others were more subtle. However, there can be no question that the generally chaotic tone and the challenging of norms are causing investors to change the way they deploy capital.

Defence stocks remain in focus and were jostled by two key themes.

Firstly, President Trump has threatened the Iranian regime with military action if its efforts to repress local protests are not tempered, a requirement the regime will find difficult to meet. Secondly, Trump has continued with assertive rhetoric and candour over his now, very public, desire to assimilate Greenland into the U.S., and his refusal to rule out the use of force.

While the prospect of this leading directly to significant military action seems remote, it does emphasise the new vulnerability NATO members are likely to feel over the protection which the alliance had previously afforded them. The logical conclusion is that countries need to develop and invest in their own military capabilities.

President Trump’s recent emphasis on military-focused measures has followed last year’s focus on economic measures, most notably tariffs. However, many of those measures are now in doubt. So far, the Supreme Court of the United States (SCOTUS) has been expected to produce an opinion on this topic twice this year, but as yet, no opinion has been forthcoming.

We have a better idea over the timing of President Trump’s assault on monetary policy because the Court is due to hear oral arguments in the case of Lisa Cook, the Federal Reserve (the Fed) governor, whom President Trump would like to dismiss.

The case is over whether the discrepancies on her mortgage application were an oversight or a fraud, but the reason for bringing the case to SCOTUS is that the President would like to influence monetary policy by placing his own nominees on the Federal Open Markets Committee, which sets interest rates.

Wednesday’s oral arguments should give an indication of whether SCOTUS is planning to rule on the individual case or the broader issue of whether the President has the power to fire members of the Fed’s board.

If the court tackles the wider case and rules in the President’s favour, it’ll have significant impact on monetary policy, effectively handing him de facto control. It would mean lower interest rates and a weaker dollar.

U.S. inflation remains higher than desired

Until inflation hits target, the Fed will react to economic data, such as last week’s U.S. inflation report.

The President’s preference for lower interest rates was helped by the unexpectedly weak U.S. core Consumer Price Index (CPI) inflation. While lower than expected, inflation remains slightly above target.

There remains some evidence of tariffs affecting inflation, but it isn’t vast and it’s tended to be overshadowed by weakness in other categories like used cars this month. Shelter costs should keep overall inflation restrained but core services remain a little high.

This makes the case for further interest rate cuts difficult to make right now, and so rates are expected to remain on hold until the summer (June or July). Much will depend upon the outlook for the labour market, which for now appears to be treading water.

Positive results from U.S. banks

Economic data can only tell you so much. At the start of the new earnings season, a lot of focus is on the banks to see what they can tell us about their own businesses and the state of the broader economy.

Last year was a great one for banks, with the interest rate environment broadly supportive, companies doing large deals, a big increase in corporate borrowing, and plenty of market upheaval to trade through, even if the final quarter saw some moderation in these trends.

According to the banks, the economy is in good shape, with consumers spending and businesses investing. The short-term outlook remains positive even while the protective institutions of the U.S. economy and global community come under pressure from a disruptive president.

Coming up – 20 January to 26 January

Legal wrangles:

 SCOTUS is due to hear evidence on whether President Trump can fire Fed Governor Lisa Cook and could rule on the legality of the ‘Liberation Day’ tariffs.

UK outlook:

The inflation rate is expected to edge higher in the short term, but hopes are that it will fall over the medium term.

Earnings season continues:

 The second week of earnings season sees a broader focus extending beyond just the banks.

Jobs growth in December was slightly below expectations, but the most eye-catching figures were the revisions to November’s numbers. Non-farm employment has failed to return to its previous peak since November, which was affected by the U.S. government shutdown.

The unemployment rate declined, but if jobs growth is low or even negative, the Federal Reserve (the Fed) will be keen to cut interest rates and may possibly do so sometime in the second quarter.

The ‘Donroe’ doctrine

Former U.S. President James Monroe believed that any external power’s interference in the politics of the United States should be treated as a hostile act. This principle has been cited as the rationale for the indictment, extraction and pending prosecution of Venezuelan President Nicolás Maduro and his wife. The accusation? Facilitating the transit of narcotics into the U.S. as an act of narco-terrorism.

The extraction only had a modest impact on major markets. Few mainstream leaders express any sympathy for President Maduro, whose position was widely considered illegitimate anyway. Once a rich country, Venezuela now has minimal impact on economic growth and has been a bond market pariah for many years.

Despite having the largest proven oil reserves in the world, Venezuela’s current production is marginal, with extraction and transport infrastructure having fallen into disrepair, particularly following their nationalisation under former President Hugo Chavez (which contributed towards the country’s growing reliance on narcotics as a source of revenue).

There’s scope for a huge increase in Venezuelan oil production of hundreds of thousands of barrels per day this year, and potentially a few million barrels per day in future years. This stretched timescale made no immediate impact on the oil price this week, but some oil stocks did benefit.

Chevron has production in Venezuela and is therefore best placed to extract and transport oil from the region. Exxon Mobil and ConocoPhillips hold legal claims on Venezuela, which could now be satisfied.

Other perceived beneficiaries included those refining companies that have capacity on the U.S. Gulf Coast. Crude oil comes in various flavours, and the Gulf Coast refineries are configured to use heavy crude oil, such as that which comes from Venezuela, which is quite different from the light oil the U.S. produces.

President Donald Trump’s plan for a U.S. led revival of Venezuela’s oil industry would be a year-long process, which could potentially cost upwards of USD100 billion and create opportunities for oil services businesses such as Halliburton and Baker Hughes.

However, it’s important to recognise that despite the ousting of President Maduro, Venezuela retains a deeply entrenched criminalised state structure, which needs to be displaced to encourage the kind of investment that brings oil output up to potential.

Aside from addressing narco-terrorism and increasing access to heavy crude oil, the intervention in Venezuela expanded U.S. influence over the region, which has been courted over many years as a source of mineral resources for China.

Under U.S. sanctions, China had become the marginal buyer of Venezuelan crude oil, a supply that is now being redirected towards the U.S.

President Trump and his administration have also expressed determination to acquire Greenland, another mineral-rich region that has a strategic geographical value. The White House Press Secretary’s statement that “utilising the U.S. military is always an option” supports the idea that countries will need to invest in their domestic productive capability and seek to diversify their financial assets to reduce risk during a period of geopolitical decoupling.

Going for silver

Another prescient illustration of China and America’s resource rivalry comes in silver; China announced at the start of the year that it would restrict exports.

Silver normally trades like a particularly volatile precious metal but has more recently begun to be considered a critical industrial metal. China is the second biggest miner of silver, but by far the biggest refiner of silver.

Silver can now only be exported from China with government permission. It is not banning exports but rather adjusting the speed of licensing as a tool with which to manipulate global supply chains. Western silver consumers are moving to secure supply.

China is reliant upon imports of silver ores from Peru and Mexico, which other consumers are now understandably keen to intercept. China cannot permanently restrict the silver market as its share of mined silver is too low, but it can cause a medium-term bottleneck while sourcing, verifying and refining capacity catches up in other regions.

In the meantime, the silver market remains under acute strain, with critically low inventories across key hubs colliding with heavy speculative demand, notably from Chinese retail investors. It means that paradoxically, despite the export restrictions, silver is actually more expensive in China than in the West.

Coming up – 13 January to 19 January

Earnings season begins:

The banks kick off the first quarter earnings season.

U.S. inflation data:

We’ll see if the inflation data supports the case for a rate cut.

Taiwan Semiconductor Manufacturing (TSMC):

With plenty of focus on how long the investment cycle can continue, TSMC will announce earnings in a report that’ll be scrutinised for demand guidance and capital investment plans.