Weekly Market Recap

Most of last week was dominated by geopolitical news related to the U.S. and China, but the week ended with the U.S. non-farm employment report. This was being closely watched because a strong report would reduce the rationale for interest rate cuts and could imperil the strong equity market performance.

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.

Global equity markets reached record highs last week, with gains broadening beyond the largest technology names.

Support has come from a third consecutive interest rate cut by the Fed, alongside an upward revision to its growth forecasts, reinforcing its confidence in the economic outlook. This combination has helped broaden the rally in the U.S. equity market beyond the usual Artificial Intelligence (AI) darlings.

Meanwhile, markets are becoming more critical of the scale of capex into AI and the stretched valuations across parts of the AI ecosystem. Concerns are particularly focused on the capability of those laden with high debt to finance infrastructure build-outs.

The focus last week was the Fed’s latest decision for a widely expected rate cut. More important than the move itself was the message from the updated projections. The Fed revised its growth outlook higher, reflecting resilience in domestic demand, and it continues to expect the labour market to remain relatively steady.

Inflation forecasts for next year were revised modestly lower, but policymakers still don’t expect inflation to return to target until 2028. This highlights that the final stage of disinflation is likely to be gradual rather than straightforward.

That guidance also highlights the limits to further easing. The Fed’s projections point to just one additional rate cut in 2026, compared with market expectations of closer to two cuts. This suggests there’s limited scope for rate expectations to fall much further, unless the data weakens materially. This has fuelled debate around how much policy support the economy actually needs if growth remains firm.

Speculation continues regarding the future leadership of the Fed, with some assuming that a chair appointed by President Donald Trump could lean more dovish. However, the chair is only one of 12 voting members on the Federal Open Market Committee, and policy outcomes ultimately reflect the balance of views across the committee. Recent projections suggest this balance remains cautious rather than aggressively accommodative.

Concerns over AI capex

Against the backdrop of improved market sentiment, technology stocks underperformed last week, even as interest rates moved lower. Ordinarily, easier financial conditions would support valuations across growth sectors. Instead, the relative weakness reflects elevated valuations and growing investor unease around the scale and returns of capex tied to AI.<

One example is cloud computing provider Oracle, an important player in the AI data centre build-out. Despite a strong pipeline from its AI business, Oracle shares fell sharply after the company signalled a significant increase in capital spending. Investors are scrutinising Oracle because it’s taken out significant debt to fund its ambitions.

Investors are concerned about its balance sheet pressure, the long lead time before revenues fully materialise, and its worsening credit quality. In short, despite strong orders and promising prospects, there are signs that investors are getting impatient for AI’s return on investment.

Meanwhile, chip designer Broadcom delivered another strong set of results and reaffirmed robust AI demand. Yet its shares failed to excite investors, partly because expectations were already high following a strong rally this year.

These moves don’t suggest the AI theme is fading, but they do indicate that markets are becoming more disciplined, with a sharper focus on execution, corporate leverage, free cash flows, and valuations, rather than exciting headlines or headline demand growth. These moves reinforce the importance of diversification and selectivity in the current environment.

Weak UK GDP supports Bank of England rate decision

Turning to the UK, the latest economic data reinforces the picture of a stagnant economy. Gross domestic product (GDP) contracted by 0.1% in October, and on a three-month-on-three-month basis (May to July vs August to October), output was also down 0.1%.

In fact, the UK economy has expanded in just one of the past seven months, underlining how fragile growth has become. The weakness has been broad-based, particularly across services sectors such as retail and construction, reflecting ongoing pressures on household spending and cautious business behaviour.

Some of this softness may reflect uncertainty ahead of the Autumn Budget, as firms and households delayed decisions in the face of potential tax changes. However, the medium-term outlook remains challenging.

Further tax rises are expected over the coming years, which risk weighing on consumption and investment at a time when growth is already struggling to gain traction. This leaves the UK economy vulnerable to prolonged stagnation rather than a clear recovery.

Encouragingly, UK inflation dynamics are moving in a more favourable direction. The Bank of England (BoE)’s latest survey shows a further easing in households’ inflation expectations, suggesting that underlying price pressures are expected to become more manageable. 

Combined with weak growth momentum and a peak in inflation, this provides a substantive argument for policy easing.

Against this backdrop, the case for a BoE rate cut at its next meeting has strengthened and is now mostly priced in by markets.

Coming up – 16 December to 22 December

Central bank decisions: 
The BoE, European Central Bank (ECB) and Bank of Japan (BoJ) will deliver policy decisions. The BoE is expected to cut, the ECB to stay put and the BoJ to hike.

U.S. inflation and jobs update: 
We will get a fresh view of the state of the U.S. economy with the release of the delayed U.S. Consumer Price Index (CPI) for November and the jobs report for October (partial release)/November.

Global purchasing manager indices: 
These reputable private sector business surveys will provide the latest update on the global economy as 2025 concludes.

U.S. investors returned from their Thanksgiving holidays with a focus on this week’s Federal Reserve (the Fed) interest rate decision. Bets on a rate cut have been bolstered by tentative evidence of job market weakness.

The official non-farm payrolls report for November was not released on Friday as the Bureau of Labor Statistics is still catching up from the government shutdown. In its stead, evidence has had to come from private sector studies, like the ADP Employment Report and the Challenger Report.

The S&P 500 has been hovering near all-time highs but struggling to gain significant traction. It has benefitted from the anticipation of lower interest rates and most investors expecting slower jobs growth. Meanwhile, other risk assets have found the going harder.

Cryptocurrencies recovered a little after their precipitous falls during October and November. The more conventional limited supply asset, gold, recovered much sooner and continued that recovery last week.

In the aftermath of the UK Autumn Budget, gilts and the pound have broadly held on to their gains, outperforming most other government bond markets. The exception would be Japanese government bonds (JGBs), whose yields have continued to rise, bucking the trends of other government bond markets. Thirty-year JGBs have fallen in price by about 20% this year.

Race for the Fed chair heats up

Speculation remains rife about who will succeed Jay Powell as the next Fed chairman, with the prediction markets now firmly favouring Kevin Hasset.

As director of the National Economic Council, Hassett forms part of the White House economic team. While this demonstrates his suitability based on knowledge and experience, it also raises questions over his independence. Those questions are added to by his recent assertions that the Fed should be cutting interest rates more, a view shared with President Donald Trump.

Hassett’s also likely to be remembered for his co-authorship of the infamous Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market. The book, published in October 1999, argued that the Dow Jones Industrial Average would triple in value over the coming two to four years, however, over that time period, it barely grew and was at one stage 30% down.

The prediction markets indicate that Hassett is the frontrunner, but that he is unlikely to be named as Powell’s successor until next year or assume the position until May 2026. He would be joining a Fed that has historically operated by consensus but has recently become more divided, this is due to the injection of Stephen Miran as a governor, who joined directly from the White House alongside two more explicitly dovish Fed members.

By May, the Supreme Court will likely have ruled whether President Trump could fire Fed Governor Lisa Cook. If the court rules in the president’s favour, he would be able to name a third governor and increase his influence on the committee, although probably not decisively.

Pensions threat to German defence spending

In Germany, Fredrich Merz’s coalition government passed its pension bill. This was achieved despite a rebellion by 18 younger members of his own party, who argued that the increased spending was shifting the burden of pensions spending to future generations.

This example of politics reflecting intergenerational interests threatened to derail one of the policies the Social Democratic Party had brought to the coalition. Had it failed, the coalition may have collapsed, raising the prospect of further elections. Current polling indicates the right-wing Alternative for Germany (AfD) party might attract the most votes, which would have made it harder still to exclude it from government.

The AfD is less keen to loosen Germany’s restrictive debt break policy and increase defence investment. However, even though the AfD’s popularity has continued to grow, its path to power still seems elusive.

It is currently only the second largest party, with no new elections due until 2029. If the collapse of the coalition triggered new elections, AfD still seems short of a majority, and would likely be excluded from government by the other major parties.

Sentiment was supported by renewed expectations of monetary easing in the U.S., as incoming data pointed to a softer economic backdrop.

While the overall market tone remains one of caution due to lingering concerns over high U.S. artificial intelligence (AI) stock valuations, investors cheered on improved rate cut expectations and signs of near-term fiscal clarity.

In the UK, all attention was on the Autumn Budget, which highlighted the government’s efforts to balance fiscal responsibility with the need to sustain near-term activity.

The Budget was broadly viewed as fiscally conservative. Chancellor Rachel Reeves announced a much larger fiscal headroom of £21.7 billion, a figure more than double the £9.9 billion previously projected.

This headroom was achieved by a combination of more favourable forecasts from the Office for Budget Responsibility (OBR) and a sizeable package of tax rises.

Markets interpreted this larger fiscal buffer as a signal of discipline, particularly at a time when gilt investors have been wary of potential policy slippage. Gilt yields fell modestly after the announcement, and the pound edged higher, reflecting a constructive reaction to the government’s strengthened capacity to meet fiscal rules.

Autumn Budget shows fiscal pain to be backloaded

It was well known that the Chancellor would need to cut spending or raise taxes, as changes to the OBR’s growth forecasts meant she was no longer on track to meet her fiscal rules.

In response, she is increasing borrowing in the near term, while raising the tax burden later. In practical terms, this means ‘pain is backloaded.’ This will mainly be achieved through £26 billion in tax increases, three quarters of which will not be implemented until April 2028.

Amongst the main measures announced were:

• freezing income tax thresholds until April 2031, which will raise an estimated £8 billion in the 2029/30 tax year.
• subjecting salary sacrificed pension contributions above £2,000 to both employer and employee National Insurance contributions from April 2029, which will raise an estimated £4.7 billion in the 2029/30 tax year.
• increasing income tax rates on dividends, property, and savings by 2%, which will raise an estimated £2.1 billion in the 2029/30 tax year.

On top of these revenues of almost £15 billion from personal tax increases, a further estimated £11 billion in revenue is to be achieved from a series of smaller measures.

While fiscal tightening is backloaded, spending measures were frontloaded, consisting mainly of £10 billion of welfare measures (including the expected removal of the two-child benefit limit).

Overall, the Budget remains modestly contractionary for growth across the forecast period. There is frustration amongst businesses over the lack of a pro-growth spirit or constructive strategies to tackle dire productivity growth.

While the Budget is not expected to materially reshape the interest rate outlook, it also does not stand in the way of the Bank of England (BoE) cutting rates in December.

Against the mildly growth-supportive loosening of policy in the near term, the package announced also included measures which the OBR estimates will reduce Consumer Price Index (CPI) inflation by 0.5% in Q2 2026. This includes freezing rail fares, extending the fuel duty freeze, and an energy bills package that aims to reduce bills by an average of £150 per year from April 2026.

Encouragingly, the OBR’s inflation forecasts show CPI inflation at 2.4% in Q2 2026, an improvement to the BoE’s forecast of 2.9% year-on-year made in its November Monetary Policy Report. Financial markets continue to price in a high probability of a BoE rate cut in December, citing muted growth and moderating inflation trends.

Looking beyond the near term, longer-term fiscal challenges remain. The OBR now projects the UK tax-to-GDP (gross domestic product) ratio to reach a new all-time high of 38.3% in 2030-31, markedly above its projection in March.

While the chancellor’s efforts may offer short-term reassurance to investors, structurally higher tax burdens risk reducing incentives for both businesses and workers. That could weigh on investment decisions and growth trends over time, particularly if economic momentum weakens more than anticipated. If tax receipts fall short because of weaker growth, this may reignite concerns for higher taxes or increased borrowing in the future.

Weak U.S. data fuels December rate cut bets

Turning to the U.S., recent economic data came in softer than expected across several fronts, reviving expectations of a December rate cut.

September retail sales increased by just 0.2% month-on-month, which was much lower than both experts’ anticipations and August’s figures. Weakness was seen in motor vehicle sales and discretionary categories.

November data from the Conference Board showed that consumer confidence saw its highest decline since April, with forward-looking measures falling to their lowest in over a year. Part of that could be related to the prolonged government shutdown, but it also revealed rising concerns around income security and the labour market.

For instance, the share of consumers that expect their incomes to rise in the next six months fell to the lowest level since February 2023. The views on current and future business conditions deteriorated.

In addition, U.S. regional manufacturing surveys like the Richmond Fed Manufacturing Index pointed to further moderation in activity. Meanwhile, producer prices came in below expectations, which indicated that tariffs haven’t materially impacted factory gate prices.

The broad U.S. data tone suggests that the economy is still expanding, but at a slower pace, and that price pressures will continue to ease due to the cooling labour market.

The Federal Reserve (the Fed) will not receive another employment report before its December meeting, and visibility on inflation will also be more limited than usual.

Traders initially viewed a December pause as the most sensible course of action. But last week’s range of weaker-than-expected data changed that narrative. The market is now pricing in an over 80% chance of a December rate cut.

Markets traded with a more cautious undertone last week, as concerns around stretched AI valuations linger despite Nvidia once again reporting an outstanding quarter. U.S. economic data provided little clarity ahead of the December Federal Reserve (the Fed) meeting, while UK indicators weakened further ahead of this week’s Autumn Budget.

Let us kick off with AI, and markets were nervous ahead of the highly anticipated Nvidia earnings results on Wednesday 19 November.

As the poster child and arguably one of the biggest beneficiaries of AI, Nvidia is in a position to make or break the AI enthusiasm that has propelled global stock markets to record highs this year. It once again beat high expectations and delivered a stellar report card. Revenue increased 62% year-on-year (YoY), and earnings per share surged 67% YoY against a tremendous base, both handily above expectations.

In terms of outlook, Nvidia highlighted continuously strong demand for AI data centres, high utilisation rates, and continued momentum in new platform deployment. CEO Jensen Huang said demand for Blackwell (its top AI chip infrastructure) is “off the charts”. Broader integration across software and networking reaffirms Nvidia’s competitive advantage.

As a result of its moat (its long-term competitive advantage), the business is highly profitable, with an impressive 75% gross margin guided for Q4 2025, despite the surging cost of memory chips.

However, market reactions show sentiment has turned fragile on AI. Nvidia and the broader AI-related stocks initially rallied but reversed intraday to end the session lower. With Nvidia now comprising around 8% of the S&P 500 index, its price movement has a significant influence on the broader market.

This behaviour suggests even companies with exceptionally strong fundamentals and growth prospects face a valuation reality check. It could simply come down to investors taking profits before year-end across a sector that has performed so well.

It’s too early to say that the AI rally is over, but we are entering a stage where investors are putting more scrutiny on aspects such as return on investments and valuations.

The long-term AI opportunity remains intact. Demand for compute capacity (the total amount of computing resources available to process data), infrastructure upgrades and AI adoption continues to accelerate. However, the market discussion has shifted from pure growth momentum to valuation and over-investment risks.

While we believe that AI will be a transformative technology, there are lingering questions about whether the returns generated by providers of AI services will be high enough to justify both the massive levels of investment, and the extended valuations the AI picks and shovels plays trade on. In addition, the S&P 500, excluding the so-called ‘Magnificent Seven’, also trades on a large price-to-earnings premium compared to the World ex U.S. market.

The U.S. unemployment rate rose

Another highly anticipated event last week (w/c 17 November) was the release of the September U.S. employment report, which was significantly delayed due to the U.S. government shutdown.

The report showed 119,000 new jobs were created over the month, well above the 51,000 expected. However, the unemployment rate edged higher from 4.3% to 4.4%. This was the third consecutive monthly increase, defying expectations of no change. This is likely to add to the dovish view within the Fed.

However, the Fed will not receive another jobs report before its December meeting, and visibility on inflation data is expected to remain more limited than usual due to the previous government shutdown. With the labour market a bit weaker (but still generating jobs), and conditions not deteriorating sharply, most investors now view a Fed pause in December as the most appropriate and likely scenario.

Markets have reduced expectations for a December interest rate cut, and further policy easing is considered more likely from 2026 if inflation and growth slow.

Economic trouble for the chancellor

In the UK, the data flow remained weak ahead of this week’s Autumn Budget. October retail sales fell by 1.1%, while the private sector business survey (PMI) suggested the economy was stagnant. Fiscal indicators have deteriorated, with the fiscal deficit widening more than expected in October.

This is an economic backdrop that makes it hard to raise taxes without further dampening growth, but it’s widely speculated that this is what Chancellor Rachel Reeves will do.

One silver lining is that inflation is heading in the right direction, albeit slowly. Headline UK CPI (Consumer Price Index) slowed from 3.8% to 3.6% while core inflation slowed from 3.5% to 3.4% in October. Services inflation, which is closely monitored by the Bank of England (BoE) as a measure of domestic price pressure, softened from 4.7% to 4.5%, falling below expectations.

A lower inflation trajectory helps support the case for a rate cut in December. Markets are pricing in a very high chance of that happening. Ultimately, whether the BoE will proceed with that depends on Governor Andrew Bailey’s swing vote. The latest inflation figure probably ticked a box, but we still need to see how the Budget goes.

Overall, last week’s market action reflected a more cautious stance. AI remains the dominant structural theme, but greater scrutiny is being applied now, so the bar for a further rally is high at this stage.

In the U.S., job growth continues, but there are signs of cooling. In the UK, data confirms a weakening backdrop ahead of significant fiscal decisions that ultimately impact growth.

Staying diversified remains highly relevant in this environment.

Last week saw a challenge to the prevailing market sentiment, moving from cautious optimism to a more pronounced nervousness, triggered by fragile geopolitical truces, evidence of economic cooling and (for gilts) a potential U-turn in UK fiscal planning.

In the current financial landscape, a dichotomy exists between high-growth structural technology demand i.e. artificial intelligence (AI), and short-term cyclical credit risks. The two should not be directly connected but as is so often the case, the best performing assets are susceptible to pullbacks when investor anxiety rises. That seemed to be the case last week.

Macroeconomic and credit backdrop: Signs of cooling

The best news of the week was that the U.S. government shutdown finally came to an end. While it was in place, we were without the usual catalogue of economic indicators. Those that were available (from private sources) were downbeat. For example:

• U.S. small business nervousness: The National Federation of Independent Business (NFIB) survey of smaller businesses showed weakness across several categories. Companies are less confident that the economy will improve, they are less likely to increase employment and have lower expectations for sales.
• Evidence of credit distress: The structural issues in the credit market are worsening, especially in less-liquid areas:
  • Commercial real estate (CRE): the commercial mortgage-backed securities (CMBS) market, the timeliest indicator of distress, confirmed a rise in delinquency. The CMBS loan delinquency rate (30+ days past due) rose to 5.66% in the third quarter of 2025 (source: MBA). While traditional bank data is lagged, this shows concentrated distress in non-bank and office-sector debt.
  • Private credit: the Federal Reserve’s (Fed’s) Financial Stability Report (FSR), released on 7 November 2025, confirmed elevated vulnerabilities, noting that while banks are sound, the ability of risky privately held firms to service their debt continues to decline amid high corporate leverage.
• UK economic fragility: The UK economy is suffering from a cautious business sector in anticipation of a tax hiking Autumn Budget. The unemployment rate rose to 5% in the three months to September, increasing the risk of weak consumer demand and late payments for small-to-medium enterprises (SMEs).

UK Budget speculation: The tax U-turn challenge

The focus last week on the upcoming Autumn Budget taking place on 26 November was dominated by speculation that risks undermining the government’s hard-won fiscal credibility.

The background to this was a slightly greater-than-expected increase in unemployment to 5%.

• Doubt over “hard choices”: Chancellor Rachel Reeves has successfully anchored gilt yields by maintaining a stern rhetoric of fiscal prudence and signalling a willingness to make “hard choices.” The market appraisal of this restraint is fragile, relying entirely on the assumption that the government will deliver sufficient revenue-raising measures to plug the estimated £30 to £40 billion fiscal shortfall against its fiscal rules.
• The U-turn briefing: Press reports last week indicated that the Chancellor may feel she has to revisit plans to increase headline income tax rates due to internal political pressure. Instead, the final Budget is expected to rely on a complex mix of ‘stealth taxes’, such as extending the freeze on tax thresholds (fiscal drag) and targeting wealth through adjustments to capital taxes.
• Market risk: There are a couple of reasons to be concerned about this. Currently, there are an estimated 1,100 tax reliefs in the UK. These undermine the concept of tax neutrality, meaning that, when spending decisions are being made, government policy is tipping the scales in favour of one area or another.

This lack of tax neutrality risks causing inefficient allocation of resources. But also, if the final Budget’s numbers are perceived by bond investors to be based on unreliable future spending cuts or insufficient stealth taxes, the gilt market could react badly, resulting in a rise in the political risk premium and higher government borrowing costs.

Rumours of the existence of two Budgets (one with headline tax increases and one without) rattled the bond market, as did rumours of a leadership challenge within the government. The Starmer/Reeves combination may be under pressure politically but remains the ‘devil-you-know’ as far as the bond market is concerned.

Geopolitics: Fragile truce and structural de-risking

The U.S.- China trade dynamic remains an exercise in tactical de-escalation rather than fundamental peace, while Europe’s approach hardens.

A couple of weeks ago, we saw a thawing of relations, with a truce reached between the U.S. and China over trade. Investors realised it was temporary in nature, but last week, the concerns were for how complete the agreement was, specifically in relation to Chinese purchases of U.S. soybeans. These commitments have not been officially recognised on the Chinese side, and purchases don’t seem to have resumed.

Meanwhile in Europe, European Commission President Ursula von der Leyen expressed the region’s commitment to “de-risking” it’s relationship with China. This strategy led to the official anti-subsidy probe into Chinese Battery Electric Vehicles (BEVs) and the activation of new trade defence mechanisms like the Anti-Coercion Instrument (ACI). It creates a long-term headwind for Chinese exporters and accelerates the trends of supply chain diversification and global fragmentation.

Risk assets: Rotation into resilience

The combination of geopolitical tension, economic cooling, and valuation concerns triggered a clear shift to risk aversion last week, with investors rotating out of speculative growth and into assets offering stability and structural tailwinds.

• Tech sell-off: Global equities experienced a pullback, led by the previously market-leading technology sector. The Nasdaq Composite gave back a fraction of recent gains as investors engaged in profit-taking, questioning the lofty valuations of AI-linked stocks and pricing in slower economic growth. This sector weakness comes at a time when RBC’s technical analyst noted the breadth of the market has been showing signs of improving, which is usually a good sign.
• Defensive sectors: This increased breadth was reflected more explicitly in defensive sectors like healthcare, utilities, and industrials. These outperformed, finally enjoying some benefit from their more predictable earnings, attractive dividend yields, and the long-term investment required for reshoring and supply chain diversification.