MARKETS HAPPY HOUR PODCAST

In today's Markets Happy Hour Podcast we digest another busy week of market movements, economic data, momentum shifts and shifting expectations. We start with the surprisingly low (and under control) inflation data from Europe, where Eurozone inflation came in at 1.7%. This has led to the ECB maintaining rates on hold and Christine Lagarde suggesting that the Eurozone is in a “good place” (at least with respect to inflation), and similarly the Bank of England kept its rates on hold at 3.75% although did hint at a further cut later in the year (its inflation had surprised on the upside in December at 3.4%). Turning to the economy vibe checks, it is interesting to see that there remains a divergence between customer's actual experience (trending downwards) and expectations (low and remaining low), as actually expectations have never really been too elevated, despite the foaming at the mouth that has occurred by onlookers of the "red hot" economy. Employment numbers have been weaker than expected, while expectations are weaker still, so there is definitely a cloud hanging over the K shaped economy, especially as the oil price gets higher on geopolitical concerns, which could drive pump prices. All eyes remain on the putative Chair of the Fed, Kevin Warsh, and there has been some vacillation around his expected positioning. It is clear he is in favor of a smaller Fed, with a shrunken balance sheet, but his positioning around inflation is less clear. Is he a hawk and mindful of inflation – or does he not consider it important – as calculated by economists anyway. The answer to this question could dictate his positioning around rate cuts and for now, he is a bit of a challenging study. The initial expectation that he would be hawkish (another Volcker?) sent the dollar higher and other assets into somewhat of a tailspin this week. Gold and silver were particularly hard hit, with both falling precipitously, silver more than gold. This may have been due to technical factors such as silver being essentially thinly traded, but either way it was spectacularly bad timing for an asset class that had been recently driven upward by a large degree of retail buying. Bitcoin had an even worst trajectory – and has now fallen back to its pre-election levels, below $70,000 as we write. There is no particular fundamental reason for this, although it is clearly a risk-off trade, and it could be an indication of the risk aversion coursing through tech exposures currently. Finally turning to tech stocks, the focus on capex after the Alphabet earnings call indicates that investors are increasingly scrutinizing capex to see if the expenditure will be justified. There is more skepticism regarding tech stocks broadly, particularly after the staggering revelations about Moltbook, a social network for AI agents. This perhaps sent a chill – a reminder that the pace of advancement in AI has been rapid, and perhaps that it has got ahead of our ability to control it. More skepticism ensued. The fallout from this skepticism was a rise in rotations – from growth to value (value has outperformed growth for the last three months, from tech stocks into smaller and mid-cap stocks and out of the US into non-US equities. For clients with a broadbased portfolios this will be rewarding.