2026 Weekly Update

Market update

The S&P 500 closed the week at 6,878.88, -0.44% lower. The Dow Jones closed at 48,977.92, -1.31%, with the Nasdaq lower by -0.95%. The volatility index VIX closed the week at 19.86, up from 19.09. The Euro Stoxx 600 rose +0.52%.

The 10-year UST closed at 3.94%, down from 4.08% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 27bps. US Corporate Bond spreads: Investment Grade spreads widened +3bps at 83bps and High Yield spreads widened +12bps at 340bps. German 10-year Bunds yield closed at +2.64% down from +2.74% a week before. In Europe, Corporate Investment Grade spreads widened +2bps at 90bps and High Yield widened +3bps at 313bps.

The US Dollar Index (DXY) depreciated -0.19% last week and closed at 97.61. The Euro closed at 1.1812 (+0.24%); the Yen depreciated -0.64%, closing at 156.05 and the Swiss Franc appreciated +0.81%, closing at 0.7693. Gold closed at $5,278.93, appreciating +3.36%. Oil was higher, Brent closed at $72.48 (+1.00%) and WTI at $67.02 (+0.95%).

Macroeconomy

Conflict implications

Over the weekend, geopolitical tensions rose as the US began its strike into Iran resulting in the death of its Supreme Leader Ayatollah Ali Khamenei. At this juncture, questions remain about who will take over and if there are any implications to the global economy and what are the disruptions to oil. Concerns now are not just on risks of attacks on countries hosting US bases but also a likely attempt to close the Straits of Hormuz. Added on with that, the leadership of Iran also causes concern, and a protracted civil war cannot be ruled out. With the US unlikely to send troops on the ground, it’s not clear if full regime change is achievable and its outcome would be highly unpredictable, which naturally leaves questions of whether a negotiated resolution can still be found. At the same time, we’ve seen a widening of the conflict to Lebanon overnight, with Israel striking targets in the country after Hezbollah fired rockets into Israel. As of this morning, Brent is about +8% higher at $79/bbl, having briefly been as high as $82 as trading in Asia opened. The spike comes as tanker traffic via the Strait of Hormuz has largely stopped with Iran having attacked three oil tankers over the weekend, though Iran’s foreign minister said on Sunday that Iran was not seeking to close the Strait. There is a view that ahead of the mid-terms, the US administration will do what they can to ensure Iran struggles to block the Strait for long. Investors will also be watching the extent of damage to Iran’s oil export facilities. Meanwhile on Sunday, OPEC+ announced a supply increase of 206k barrels a day in April, following an increase of 137k a day in December. This is a decent rise, but it would not change the bigger picture if there were a sizeable disruption to oil flows. Global markets are showing a clear but not extreme risk-off reaction this morning. S&P 500 futures are down -1% from Friday’s close, with those on the STOXX 50 down a larger -2%. Europe is more negatively exposed to higher energy prices, including also possible disruptions to LNG shipments from the Gulf. Meanwhile, in Asia, the Hang Seng (-2.15%) and the Nikkei (-1.35%) are among the worst performers, also affected by declines in technology stocks. The Shanghai Comp has turned positive (+0.40%). In FX, the dollar index is +0.29% higher, while the Swiss Franc is the best performing G10 currency amid the safe-haven demand. And gold is +2.10% higher. For Treasuries, yields initially opened a touch lower amid the safe haven bid but this quickly reversed this morning with the 10yr +2.8bps higher at 3.97%, after ending last week at post-2024 lows. So overall fairly measured response to the weekend events.

Tariffs

The Supreme Court's decision to strike down tariffs implemented by IEEPA (International Emergency Economic Powers Act) will likely result in slightly higher deficits. As expected, President Trump quickly pivoted to other trade authorities by implementing a 15% broad-based tariff rate to replace the IEEPA tariffs for 150 days using Section 122 of the trade law. The average tariff rate now is slightly lower than pre-SCOTUS ruling. Then after 150 days, unless renewed by Congress, Section 122 tariffs are likely to be replaced by Section 301 (unfair trade) and 232 (national security) tariffs, returning rates to previous levels. In terms of previous tariff agreements, the EU paused the process of ratifying the US trade deal, and the chair of the EU Parliament’s trade committee, Bernd Lange, said that “we want to have clarity from the US that they are respecting the deal because that’s a crucial element.” The EU concern is that a stacking nature of the 15% Section 122 tariffs would bring total tariff rates for some products above the 15% maximum agreed by the EU and the US. The UK face another unclear situation, as they reached a 10% tariff deal last year, but could now face the 15% global tariff rate that would be higher than the deal already agreed to. Indeed, the UK government did not rule out retaliation, with a spokesperson for PM Starmer saying that “nothing is off the table at this stage”.

US data

US PPI (Producer Price Index) exceeded expectations, with headline prices up +2.9% y-o-y and core (ex-food, energy, trade) up +3.4% y-o-y. Monthly increases in headline (+0.5%) and core (+0.3%) matched or surpassed forecasts. The Conference Board’s consumer confidence reading picked back up to 91.2 in February (vs. 87.1 expected). Moreover, the expectations component also rebounded to 72.0, up from a 9-month low the previous month. There were also promising signs on the labor market, as the ADP’s weekly private payrolls series hit a 2-month high, showing 4-week average growth of +12.75k in the period to February 7.

Fedspeak

Comments from Fed officials leaned against imminent rate cuts, with Chicago Fed President Goolsbee warning that 3% inflation “is not good enough” and that they needed to make more progress. Boston Fed President Collins said rate were likely to stay unchanged “for some time” and that she was looking for more confidence that disinflation resumes. There were also discussions around AI-related job losses too, with Governor Cook saying that “our normal demand-side monetary policy may not be able to ameliorate an AI-caused unemployment spell without also increasing inflationary pressure”. On the other hand, less dovish comments from Fed Governor Waller, who said he may favor a pause in rates at the March meeting if the February labor market data showed continued improvement. However, he did add that “if the good labor market news of January is revised away or evaporates in February” then he’d again back a 25bps cut, suggesting that Waller remains among the more dovish FOMC members.

Japan data

The government nominated two reflationists to join the Bank of Japan’s board, who are perceived by markets to favor more stimulus. Also, Tokyo’s CPI increased by +1.6% y-o-y in February (compared to +1.4% anticipated), a slight rise from +1.5% in the previous month, while core inflation (+1.8% y-o-y - a tenth above expectations) has dipped below the BoJ annual 2% target for the first time since 2022. Excluding energy came in two tenths above expectations at 2.5%.

Central banks

The Bank of Korea (BOK) kept its benchmark interest rate unchanged at 2.50% while signaling that policy would stay unchanged for the next six months as a chip boom in exports and steady inflation allow policymakers more time to assess financial stability risks. Meanwhile, the central bank raised its growth forecast for 2026 to 2.0% from a previous estimate of 1.8% citing stronger-than-expected chip exports. The Bank of Thailand surprised markets with a 4-2 vote to cut its key one-day repurchase rate by 25bps to 1%, the lowest since September 2022, citing uncertainty and below-potential growth forecasts for 2026 and 2027. The bank also noted concerns over Thai Baht strength and negative impacts on SMEs. Forward guidance suggests the current easing cycle could complete, with rate hikes likely to follow other Asian central banks.

Highlights

On rates

Sovereign bonds benefited from the broader caution. Ten-year Treasury yields fell -14.4bps last week to 3.94%, their lowest level since October 2024. In Europe there were similar moves, with 10-year Bund yields down -9.4bps last week to 2.64%, marking their biggest weekly decline since April last year around the Liberation Day turmoil. Investors kept dialing back the likelihood of an H1 rate cut. The odds of a cut by the June meeting (the first with a new Chair) fell below 50% for the first time this year, suggesting more doubt about an immediate rate cut by Kevin Warsh, particularly now core PCE is back to 3.0%. In Europe, investors are pricing a growing chance of an ECB rate cut this year, with a 30% chance of a cut now priced by December.

Earnings season

The Q4 earnings season is in its final stages, with 90% of companies having reported in the US, and nearly 70% having reported in Europe. Earnings growth came in better than consensus expected, supported by firmer activity momentum. EPS growth at +4% y-o-y in Europe and +14% y-o-y in the US implies a positive surprise of 2% and 7%, respectively. As a result, S&P500 Q4 blended EPS has inflected higher. Revenue growth was also robust in the US, at +9% y-o-y, while in Europe, the Energy sector weighed on the topline delivery. At a regional level, while US earnings have continued to outpace Europe, the spread between US and European EPS growth has narrowed. Notably, this gap reduces further when looking at the median delivery; US median EPS growth moves down to +9% y-o-y rate, and Europe up to +5% y-o-y. In addition, despite the strength of the Euro in Q4, US vs Europe sales beats continued to decline. US Cyclicals delivered stronger growth than Defensives, for the second quarter in a row. European Cyclical sectors on aggregate also fared better this quarter. At a sector level, Tech and Financials were the biggest contributors to earnings delivery in the US, with Financials being a key driver of European growth, as well. Interestingly, despite the robust Q4 earnings growth recorded by the Mag-7 companies, most of the key AI stocks saw their prices flat or down on the day. A notable feature of this reporting season was the meaningful jump in the number of companies mentioning ‘AI disruption’ on their earnings calls, which is likely to remain one of key themes this year.

Equity style rotation

Global equities at a new record high. Despite a backdrop of heightened geopolitical uncertainty and AI-disruption fears it is worth noting that global equities reached a new all-time high this week as equity markets broaden out in an upward, not downward, direction. While the S&P is up 1% YTD, ACWI ex US is up 11% and the equal-weight S&P is up 7%. The start of 2026 has seen an extraordinary level of rotation at the market, sector and stock level – looking at relative performance this is the worst start to a year for US equities since 1994 and the worst start for US growth stocks since data starts in 1975. This rotation does not reflect earnings developments (the US IT sector has seen the biggest EPS upgrades YTD) but rather a shift in investment style from Growth to Value - Value stocks now expensive in absolute terms but still cheap in relative terms. After a 13% rally from its low in November, the MSCI World Value sector is now on a 12m forward PE of 17x which is the highest reading since data starts in 2003. However, it still remains at a 38% discount to the equivalent Growth index which is at 27x PE. History suggests there is scope for this discount to close further – e.g. the long-run average Value discount is 32% and the pre-Mag 7 average (2003 – 2015) discount is 24%. At the same time, Value is getting harder to find. Only 7 sectors across the US, Europe and Japan trade on a 12m forward PE below 15 which is the joint lowest number for 20 years (after 2007, 2015 and 2020-21). After the strong YTD rally in previously unloved sectors there are now some surprising relative statistics – e.g. in the US Consumer Staples trade on the same 12m PE as IT (at 24x) and Energy is on the same PE multiple as Communication Services (at 20x). When we look across the global equity market the two areas where valuations still look genuinely cheap are EM (14.3x 12m PE) and EMU Small & Mid-cap stocks (13.6x PE).

What to watch

• Monday: US ISM Manufacturing; Eurozone Manufacturing PMI; Asia Manufacturing PMI
• Tuesday: Eurozone CPI
• Wednesday: US ADP Employment, ISM Services; Switzerland CPI; Eurozone Services PMI; Australia Q4 GDP; China PMI; Taiwan January Exports
• Thursday: US Challenger Job Cuts, Initial Jobless Claims; Germany Construction PMI; Eurozone Retail Sales
• Friday: US Retail Sales, Nonfarm Payrolls, Hourly Earnings and Unemployment Rate; Germany Factory Orders; Eurozone Q4 GDP; Vietnam February Exports