Weekly Market Recap

Since then, we have seen the power over Iran move to Mojtaba Khamenei. As the son of the previous Ayatollah, this signals a continuation of Iran’s previous policy of resistance. Given that he has lost parents, siblings and children in the attacks, there does not seem to be an obvious path to de-escalation.

This sent oil prices well over the psychologically important USD100 per barrel mark, before falling alongside a broad market rally on confidence from President Donald Trump that the war would be completed soon.

Notably, the market was somewhat flat-footed. Positioning data suggested limited long exposure to crude oil heading into the weekend, implying traders hadn’t meaningfully positioned for what could be a significant supply shock.

The key concern is not Iran’s own production, at roughly 3.2 million barrels per day, it represents just over 3% of global supply. Rather, it is the potential disruption to the Strait of Hormuz, through which approximately 20% of the world’s oil passes. Iran’s Revolutionary Guards have warned that passage through the Strait of Hormuz is not permitted, and traffic has already dried up as insurers either raise premiums or cancel coverage altogether.

However, with Iran facing the world’s dominant military force, surrounded by regional enemies, and with Russia incapable of providing meaningful assistance, the base case among market participants is for a relatively short conflict. This is despite several challenges that make a decisive victory difficult.

There is speculation that Iran may become rapidly overwhelmed in the current direct conflict, and could resort to an asymmetric phase, in which the goal is not to defeat but rather to frustrate their opponents through, amongst other things, maritime disruption of the Strait of Hormuz.

This would be accomplished through Iran’s ‘mosaic’ strategy of using decentralised provincial units that have been pre-authorised to harass shipping through surface-to-sea missiles and drones. A major concern is Iran’s remaining capacity to deploy mines in the Strait, which would not require its largely disabled naval fleet.

Conversely, Iran’s economic situation was dire heading into this crisis. Official inflation stands at 68% year-on-year, though this almost certainly understates the problem given shortages and the collapse of the Iranian currency.

Compare this to wage growth of just 45% over the same period, and the pressure on ordinary Iranians becomes clear. The longer the conflict continues, the more this economic strain may force the regime towards negotiation, especially as closure of the Strait cuts off Iran’s own oil income.

How are energy markets and portfolios impacted by the conflict?

For energy stocks, the picture is nuanced. For example, the two major UK oil producers, BP and Shell, naturally benefit from higher crude oil prices and elevated volatility as their trading operations tend to thrive in dislocated markets. BP’s oil trading earnings rose by roughly USD1 billion in a single quarter when conflict last flared in the region two years ago.

BP benefits from having limited direct Middle East upstream exposure (around 8% of volumes, none of which are from Iran) and superior trading optionality. Shell benefits from greater sensitivity to the more significant liquefied natural gas price rises.

Bond markets react to inflation concerns

The conflict’s impact on UK inflation expectations has been swift. European natural gas prices doubled in the early part of the week, approaching levels not seen since early 2023. This was sufficient to shift Bank of England (BoE) rate expectations from two cuts over the coming year to just one.

Gilt yields have risen more sharply than in other markets. This partly reflects positioning after a solid rally in recent months, but also the UK’s particular vulnerability to energy price shocks as a net importer. With current yields approaching 4.5%, gilts offer attractive value relative to global sovereign bonds.

Chancellor Rachel Reeves delivered the Spring Statement earlier last week (3 March). She resisted the temptation to adjust tax policy as the Office for Budget Responsibility forecasts implied that headroom against fiscal rules has improved. However, those forecasts have been overtaken by events in the Middle East.

Dollar strength and currency dynamics

The differences in energy competitiveness between the self-sufficient U.S. and Europe and Asia, which are reliant upon imports, drive divergences in asset class performance across equities, bonds and currencies. The clearest representation of this is in gas prices, which are more sensitive to local supply than oil, which trades globally.

U.S. gas prices were unmoved by conflict in the Middle East, whereas UK and European futures prices soared, undoing a lot of the improvement in relative competitiveness that European futures had enjoyed since July last year.

Precious metals: Gold under pressure

Gold continued to be under pressure last week. This was due to the strength of the dollar and generally weaker sentiment amid Middle East tensions from both retail and institutional buyers. After having such a strong run over the last two years, led largely by central bank buying, we have now seen the first public hints of a possible sale by this group of investors.

Thursday saw the Polish central bank chief lay out a proposal to generate as much as USD30 billion from the sale of the country’s gold reserves to finance defence spending. While it’s legally prohibited for Poland’s central bank to fund the government directly, the mere fact that one of the most aggressive central bank buyers of gold is considering such action given current gold prices is telling, and something that needs to be monitored going forward.

Economic data: U.S. payrolls

The U.S. economy unexpectedly shed 92,000 jobs in February, falling far short of forecasters’ expectations of a 55,000 gain. The unemployment rate rose to 4.4%, up from 4.3% in January. Adding to the weak headline, December and January payrolls were revised down by a combined 69,000 jobs.

The data signals the U.S. labour market remains in a ‘low-hire, low-fire’ mode as employers navigate tariff-related inflation pressures, AI adoption, and geopolitical uncertainty. Thrivent’s David Royal noted that while AI may be contributing to productivity gains, which helps explain why economic output has grown even as hiring has slowed, companies remain uncertain about their future workforce needs.

The healthcare sector lost 28,000 jobs (largely due to a Kaiser Permanente strike during the survey period), while the information sector shed 11,000 jobs, and the federal government cut 10,000 jobs. Social assistance was a rare bright spot, adding 9,000 jobs.

Wage growth also ticked higher, with average hourly earnings rising 0.4% to USD37.32 in February and annual growth coming in at 3.8%.

As with the BoE, markets have already scaled back Federal Reserve (Fed) rate cut expectations, from over two cuts to just over one by year end. Friday’s data crystallises the key risk: a sharp employment slowdown coinciding with persistent inflation concerns could back the Fed into a difficult corner and create a substantial headwind for markets.

Corporate earnings: Broadcom delivers

Amid the geopolitical noise, Broadcom delivered a strong beat driven by its AI semiconductor business, which more than doubled year-on-year. The company now expects to make USD100 billion in AI semiconductor revenue for 2027, a remarkable figure that provides considerable comfort around the durability of AI-related capital expenditure.

Importantly, Broadcom has secured its supply chain, wafers, packaging, high-bandwidth memory – at a time of rising costs and industry-wide shortages. Concerns around gross margin dilution from the AI business appear overdone, with management signalling improved yields and scaling cost structures.

The stock now trades on 20 times 2027 earnings and is therefore priced for a significant slowdown in growth, with scope for further upgrades.

This provides a constructive read-across for the broader AI supply chain, as do comments from Alphabet’s CFO, Anat Ashkenazi, at Morgan Stanley’s Tech, Media and Telecom conference, which reiterated that demand exceeds supply for cloud services. Meanwhile, AMD’s CEO, Dr. Lisa Su, expressed that the cycle “continues to feel very durable”.

Coming up – 10 March 2026 to 16 March 2026

War in the Gulf:

The extent to which the fractured regime in Iran prioritises external conflict over maintaining domestic control will be key.

U.S. economic data:

U.S. inflation data released this week is estimated to show prices continuing to rise at 2.4% per annum before the impact of the oil price rises takes effect.

European Central Bank and Fed speakers:

The market assumes inflation driven by energy prices means interest rates should rise. However, policymakers may choose to look through temporary increases in costs, which serve to diminish demand. Interest rate rises usually depend on how policymakers view workers’ ability to demand higher wages.

The immediate market response

The immediate impact of the strikes saw most equity prices drop lower on Monday morning (2 March). This is quite a normal reaction and reflects a primary concern: that conflict in the Middle East will drive energy prices higher. Any increases would be reflected in higher inflation, which raises costs for businesses and households, reducing economic growth and profits. But how severe might this impact be?

Oil shocks: Then vs. now

Investors with long memories will remember when the oil price rose sharply in response to conflict in the Middle East in the 1970s, and then again in 1990 due to the Gulf War. For context, those price surges were far more severe than what we have seen so far. In early trading, oil prices rose 10%, whereas previous shocks have tended to see increases of at least 100%.

Could prices rise much further? That is the most difficult thing to forecast. Iran’s oil production comprises about 3-4% of global supply. Although it is heavily sanctioned by Western powers, there are still buyers, of which China is by far the largest, which means that Iranian oil still affects global prices.

Iran’s geopolitical isolation also limits its ability to sustain major supply disruptions. Even China, its key ally, needs Iranian energy to keep flowing.

The Strait of Hormuz: A critical passage

Iran’s influence on the global oil and gas market extends beyond its own production. The most sensitive factor is the ability of tankers to navigate the Strait of Hormuz, a narrow maritime passage that serves as the world’s most critical energy chokepoint. Bordered by Iran’s coast, prolonged disruption to shipping here would cause oil prices to spike.

While disturbing the Strait might be Iran’s most potent means of harming its aggressors, it will come at the cost of lost oil revenue and that cost will be borne by all the Gulf states who currently export via the Strait. The other party losing out is China.

While U.S. confidence in keeping the Strait navigable remains unknowable, we can be certain they have considered the implications if it remains closed. Polls of U.S. registered voters suggest that military action against Iran was only supported by around a third of respondents and that inflation remains the most important issue¹ during this mid-term election year.

Crucially, the global economy is becoming less dependent on oil in general and Middle Eastern supplies in particular. As oil consumption relative to GDP steadily declines, the market is showing greater resilience; while prices exceeded USD 120 per barrel in 2022, they remain below USD 80 even after the latest jump (correct at the time of writing).

Impact on your energy bills

Nobody likes paying a lot to fill their car with fuel, but Europeans tend to be less sensitive to oil price changes because the impact is dulled by fuel duties. They are, however, more sensitive to changes in utility bills and will remember the dramatic changes following Russia’s invasion of Ukraine.

In fact, inflation is expected to decline this year as falling natural gas prices slowly filter through to consumers, the UK’s energy price cap policy delays the pass-through of energy prices into household bills.

As a rule of thumb, if wholesale gas prices rise on a sustained basis by 10%, that could increase headline consumer price inflation by around 0.5%. Recent sustained price declines mean that inflation is likely to fall in April by 0.4%. However, Iranian drone attacks on the Qatari LNG export facility have caused its closure, leading to a sharp rise in LNG prices.

If those higher prices were to be sustained, then UK-regulated prices would eventually increase. Although for context, prices after the closure have returned to the level they were at a year ago and remain a fraction of those seen during 2022. Importantly, the UK has reduced its Middle Eastern LNG dependence in recent years, increasingly relying on U.S. supplies instead.

Bond market implications

Bond markets have reflected the potential increase in inflation to a small extent. They would be most concerned if there was any expectation that it would mean higher interest rates. Before the attacks, two UK rate cuts were expected over the coming year, after those, that second cut hangs in the balance.

While energy prices could generate upward inflationary pressure, it would also dampen consumer spending on other goods and services. So, while the impact on most bonds is mixed, the prospect of higher inflation has helped the performance of inflation-linked bonds.

Spending on defence will add to pressure on the U.S. public finances. This is one reason why gold, rather than traditional bonds, is currently serving as a more effective hedge against geopolitical risk. We are also seeing the U.S. dollar strengthen as global risks rise, following a familiar historical pattern.

The decision, which was reached by a margin of six votes to three, was widely expected, but included no detail on whether the importers are entitled to refunds. This will now need to be addressed by a lower court.

If fully permitted, refunds could total as much as USD170 billion, representing the biggest portion of President Trump’s tariff revenue, but the agonising wait for a decisive legal decision from America’s highest court has only presaged a further wait for the detail be resolved.

President Trump responded by imposing a 10% global tariff under powers designed to prevent large balance of payment deficits.

The immediate reaction is one of weakness from U.S. bond markets and the dollar, as public finances are further weakened, and an accidental tax cut is being delivered to a very distinct sector of the economy, even though the risk is that the refund issue becomes a drawn-out legal argument.

Iranian shadow looms over markets

The risk of U.S. military action against Iran remains materially elevated. This has led to gains in oil prices, and the associated equity sectors, on fears of potential supply disruption. So far, diplomatic negotiations have failed. U.S. military assets, including the world’s largest aircraft carrier, continue being deployed to the Middle East, posing a significant potential threat to Iran.

This constitutes a major test of the TACO (Trump Always Chickens Out) framework. The administration has already launched airstrikes on Iranian facilities, so the question is how willing it is to make a greater commitment, and what objective such a commitment might have.

At the end of the week, President Trump twice referenced a period of 10 to 15 days, during which Iran would need to reach a deal with the U.S. to avoid military action. That was less immediate than the build-up of military assets in the region might suggest.

However, unpredictability is one of President Trump’s hallmarks, and Iranians will remember that a previous 60-day window was cut short by last June’s U.S. air strikes against Iranian nuclear facilities (on that occasion, America’s hand was rather tilted by the earlier Israeli strikes).  

The other factor that will be weighing on the Iranian regime’s minds is this year’s extraction of President Maduro from Venezuela, which may indicate that regime change would be the objective of any operation. 

However, President Trump is a pragmatist, and his stated aim is to end Iran’s nuclear and ballistic missile programs. To what extent that requires a regime change is open to question. There’s a strong desire to avoid the extended deployments that were required in Iraq and Afghanistan in the early 2000s. 

In the case of Venezuela, for example, elements of the regime were retained and subject to U.S. pressure, avoiding the chaos that comes from a complete removal. So far, the impact on oil is assumed to be roughly USD6 to USD7 of risk premium reflected in the current oil price.

Helima Croft of RBC Capital Markets notes: “Regional observers warn that Iran would target energy facilities and economic assets to force Washington to stand down. Using naval bases in Bandar Abbas and Jask, Iran retains the ability to target tankers and mine the Strait of Hormuz, while the Houthis in Yemen and Iraqi militias maintain significant disruptive capabilities.”

The base case of a limited U.S. strike would likely see oil prices spike initially, then unwind as disruption fears fade. However, the rule of thumb is that a 1% loss of supply can cause a 4% increase in price, and with the potential for widespread disruption to transit, significant action could push prices up to USD100 per barrel or more.

President Trump’s administration will be very conscious of the domestic political impact of a price spike. It would weigh on growth and compound cost of living pressures, particularly for lower income cohorts. The president’s net disapproval over his handling of inflation has improved in recent weeks, but an oil price spike would change that, and the public support for military intervention in Iran is low.

The U.S. midterm elections take place in November, and Republicans are expected to lose control of the House of Representatives, which will radically alter the balance of power in Washington. A de-escalation would seem to be in the president’s best interests.

UK economic data shows signs of weakness

The UK had a series of economic reports out last week. They broadly underlined the case for further interest rate cuts because the labour market in particular, appears to be quite weak. An important caveat is that the data quality is low, but the unemployment rate has continued to rise to a level not seen for about a decade outside of economic crises.

However, these levels of unemployment were quite commonplace prior to the global financial crisis of 2008. It’s easy to see this as a watershed moment. While we don’t know to what extent the weakness of employment is caused by the adoption of AI (it is assumed to be modest for now) and how much is explained by the higher cost of employing UK workers, a longer-term trend seems likely.

The use of AI seems set to alter the constraint on increasing production; historically, this has been heavily tilted toward the shortage of workers, but it could be driven to a greater extent by resource and energy shortages in the future.

For now, the timeliest data comes from PAYE. It suggests employment is stable rather than collapsing, and employment surveys seem to suggest the same. The recent trend of public sector wages outstripping private sector pay abated somewhat.

Consumer price inflation slowed significantly from 3.4% to 3%, a considerable improvement but still well above target. Prices always fall in January, as some categories are discounted heavily. However, the change in the annual rate reflected the resilience of prices seen in January 2025, rather than any specific weakness earlier this year.

A way of looking through these seasonal factors is to consider median price increases. These also remain above the Bank of England’s target.

Friday saw strong retail sales, which we hoped would come, as consumers put the concerns of last year’s budget behind them. With that in mind, a measured approach to cutting interest rates remains warranted.

Coming up – 24 February 2026 to 2 March 2026

NVIDIA: 

The most anticipated earnings release comes towards the end of earnings season.

The State of the Union: 

President Trump will update Congress on his assessment of the current state of the country, offering a chance to outline future policy areas.

Focus on Iran: 

Markets will watch for any signs of de-escalation in U.S. negotiations with Iran.

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?