Weekly Edge: 24-28 February

Raise cash and/or open short positions in risk assets.

Executive Summary

• The narrative vacuum of the past few weeks is over. “Growth Scare” is the dominant market narrative; it is time to take down risk and/or open short positions. If you’re nimble, USTs can be ridden higher and probably USD also.

• Friday’s close was a bloody for equities. Every index will open this week below the 2 standard deviation lower boundary of our monthly linear trend.

  • Russell 2000 has already broken the 1-year linear trend.

  • S&P 500 is set to break its 1-year linear trend.

• JPY and GBP are the strongest pairs against the USD, but risk short-term corrections on a “flight to safety”.

• Copper is bullish trend but may pullback to test $4.45-4.50 per pound.

• USTs have been ignoring hot inflation data for weeks, and I have no doubt they will continue rallying short term if the growth scare gathers steam.

  • 2Y has already fired a bullish signal on the daily timeframe.

  • 10Y and 30Y are close to triggering bullish signals on the daily timeframe.

• Macro is light this week but Nvidia earnings on Wednesday could be the volatility catalyst. Friday is monthly options expiration.

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Macro & Economic Data Recap

Recent economic data paints a picture of generally rising inflation across major economies, with a few pockets of divergence. Notably:

• Japan’s inflation rose to 4.0% in January, above the expected 3.7%.

• UK inflation climbed to 3.0% in January, higher than the 2.8% forecast.

• France’s inflation (YoY) accelerated to 1.7% from 1.3%, surpassing expectations.

In North America, inflation concerns persist, but employment trends remain relatively stable. The Federal Reserve appears poised to keep rates on hold, emphasizing a “dovish pause” in response to still-elevated, albeit slowly moderating, price pressures. Meanwhile, Canada’s inflation aligned with expectations at 1.9% YoY, and foreign investment in Canadian government debt continued to rise. US housing data was mixed: permits (1.483M) narrowly beat consensus, while housing starts (1.366M) missed. Existing home sales also softened to 4.08M.

Europe showed patchy growth. Germany’s Manufacturing PMI beat expectations at 46.1, but remains in contraction territory, while the UK’s Manufacturing PMI slumped further below 50. Despite headwinds, Eurozone equities attracted robust inflows, helped by lower valuation multiples and optimism surrounding monetary policy easing in some parts of the region.

In Asia, Japan’s trade balance swung into a larger deficit of -2,758.8B yen, driven by an uptick in imports alongside the yen’s strength. China’s 1-year Loan Prime Rate stayed at 3.10%, roughly matching expectations, although broad money supply growth is easing. Chinese equities have enjoyed fresh inflows on the back of monetary/fiscal easing and attractive valuations, despite persisting tariff concerns.

Australia’s unemployment rate ticked up to 4.1% from 4.0%, matching estimates.

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Market Impact and Price Action

1. Fixed Income & Rates

   • Bond yields fluctuated in response to global inflation data. A “hotter-than-expected” US CPI earlier caused the 10-year Treasury yield to jump about 10bps, reflecting renewed inflation worries. More recently, the Fed’s signals of caution (and the possibility of a future rate cut if inflation cools meaningfully) kept yields in check.

   • Across Europe, German Bund yields edged up, but peripheral spreads tightened amid continued optimism on European GDP revisions.

2. Equities

   • The S&P 500 briefly touched a new high before stalling as investors juggled lower unemployment claims and persistent inflation chatter. But the Friday close was decidedly bearish.

   • Homebuilder stocks in the US lagged after weaker housing starts and renewed tariff concerns on construction materials.

   • In Europe, renewed inflows and more dovish European Central Bank language helped stocks in the eurozone outperform, with bank shares in particular rallying on better-than-expected earnings.

   • China-related equities advanced on supportive policy maneuvers, stronger consumer spending signals, and an uptick in portfolio flows seeking value.

3. Commodities & Currencies

   • Gold reached a record $2,952/oz, marking a robust year-to-date outperformance. Central bank buying and renewed investor preference for safe havens underpinned its rally.

   • Oil markets stayed relatively range-bound, with OPEC+ spare capacity slowly rising and US crude inventories building.

   • The Japanese yen strengthened to below 150 per USD, partially on rising domestic yields and safe-haven flows.

4. Corporate Highlights

   1. Walmart slid 6.5% post-earnings on a cautious outlook citing potential tariff pressures and currency headwinds, triggering a ripple effect across US retail and bank stocks concerned about consumer-credit delinquencies.

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Policy & Economic Outlook

• Monetary Policy: The Fed’s January FOMC minutes emphasize vigilance on inflation but do not rule out a gradual shift toward easing if inflation falls closer to the 2% target. Look for additional clarity in upcoming Fed communications, particularly around debt-ceiling dynamics and quantitative tightening.

• Tariff Watch: Potential reciprocal tariffs, especially in the US-China context, threaten to keep price pressures higher. This risk could be amplified if the administration proceeds with more tariffs in early Q2, putting upward pressure on inflation expectations and bond yields.

• Equities: While corporate earnings have been mixed, mega-cap tech and cyclical manufacturing names benefit from stabilizing supply chains and consumer resilience. However, high valuations (e.g., forward P/Es near historically elevated levels) raise the risk of volatility if earnings or macro data disappoint. A tilt toward select non-US equities may continue, given more attractive valuations in China and Europe.

• Housing: US housing indicators signal sustained headwinds from higher mortgage rates and tighter lending standards. However, continued job market strength supports near-term stability in purchase activity. Expect real estate to remain sensitive to any policy-driven rate changes or further macro shocks.

• Gold & Safe Havens: Gold is incredibly overbought and I’m expecting strong resistance at the round number USD$3,000 per ounce. Crypto markets are subdued relative to gold’s performance, suggesting that gold remains the primary inflation-hedge asset attracting inflows.

Overall, stagflation concerns (rising price pressures and slowing growth) are reemerging in some pockets, especially if tariff expansions materialize.