What have we learnt this week, that mattered for markets?
- Cryptocurrencies rallied on Sunday (02/03) after Trump highlighted XRP, Solana, Cardano, Bitcoin, and Ethereum in a post about his “Crypto Strategic Reserve.” This move is seen as a positive step toward legitimizing digital assets, similar to a gold reserve. The administration’s shift away from strict crypto regulations has further boosted market sentiment. Our take: Recent announcement has provided a significant boost, but sustaining these gains will depend on continued tangible regulatory developments, an overall improved risk-on sentiment, and continuation of easy policy.
- Although the critical minerals deal between the US and Ukraine has failed (at least for now, and rather publicly), Trump has received concessions from other countries through pressure. In recent meetings, both Macron and Starmer stressed Europe’s need to increase defense spending, with Starmer pledging a $17 bil. boost by 2027 to reach 2.5% of GDP. Several other countries have also announced increases in defense spending, either immediately or in the future. Our take: Significant tailwind for defense stocks as defense contractors may see higher demand for military equipment and services.
- Update on US market valuations: The S&P 500 is currently priced at 21.2x forward earnings, above its long-term average, suggesting the market is “priced to perfection,” leaving little room for disappointment. We’re already seeing some cooling in valuations for a few high-priced stocks, with the top 5 seeing a drop of 1.5x in their multiples. Our take: While this pullback in high-multiple stocks may be tough for investors who are over-exposed, it’s a healthy correction for the market overall and has not hurt the broader market. As of March 2nd, the average stock in the S&P 500 (equal-weighted SPX) is up 2.75% year-to-date and 9.8% year-over-year.
- Why are bonds rallying, and yields are moving lower? Partly due to risk-off sentiment and growth concerns triggered by tariffs announcements. But less-mentioned, and equally important is the liquidity surge from the US. The US hit the debt ceiling in January and cannot issue net new debt. As a result, the Treasury is drawing down its Treasury General Account (TGA), effectively injecting liquidity into the banking system, similar to QE. This liquidity surge is putting downward pressure on bond yields and the dollar, while also providing some buffer against policy uncertainty.
- Tariffs, tariffs, and more tariffs. Trump said that the 25% tariffs on Canada and Mexico will go into effect on March 4th and that he would increase tariffs on Chinese goods another 10% the same day. Our take: While there may be further room for negotiation for Mexico and Canada, we have said before and continue to believe, that China is treated separately from rest of the world- we expect the worst.
Bottomline for retail investors: Look beyond mega-cap AI stocks as innovation expands to mid and small-cap tech companies, globally. Watch for sectoral performance rotation from mega-cap tech to sectors like finance, healthcare, defense, renewable energy. Hedge portfolios with multi-asset diversification and consider uncorrelated assets like commodities for portfolio protection. Cash losing luster: bonds outperform cash during easing cycles.
Full agenda for investors- week ahead
ISM Data: In times of Trump’s unpredictable tariff policies, leading indicators like the ISM data are more important than ever. A clear trend has emerged in recent months (see chart): The Manufacturing PMI (Monday) has recovered and exited recession (50.9), while the Services PMI (Tuesday) has weakened but remains resilient (52.8). Investors should keep a close eye on whether this develops into a trend. An escalation in the trade war would primarily impact export-oriented industrial stocks.
Trump’s Tariff Policy: On Tuesday, US President Trump addresses Congress and the new tariffs on imports from China, Canada and Mexico come into force.
Non-Farm Payrolls and Powell: On Friday, US employment data will be released – recent job growth has been moderate. Will the slowdown continue? In the evening, Fed Chair Jerome Powell delivers a speech that could provide insights into future monetary policy. After a week full of macroeconomic data, the focus will be on whether the Fed maintains its cautious stance or signals a shift toward rate cuts. Markets currently expect two rate cuts in 2025, with the first anticipated in June.
Market Scenarios: If rate cut expectations rise, stocks and bonds could benefit, while the US dollar might weaken. A weaker dollar could support commodities like gold and oil. However, if Trump’s policies push yields higher, the dollar could remain strong, increasing price pressure on commodities.
European Inflation: On Monday, the Eurozone inflation data will be released. After rising from 1.7% to 2.5% over five months, inflation is now expected to ease to 2.3%. This could give the ECB more room to continue its rate-cutting cycle. A rate cut on Thursday is already seen as certain. Lower rates remain a key lever to revive the stagnating European economy.
Bottomline: While the US economy appears more stable, European equities, which are more attractively valued, have become increasingly appealing to investors. The key question is whether the Eurozone’s growth prospects will improve in the coming months.
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