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- A stable earnings outlook is seen as critical for software stocks amid AI disruption
- US long-dated swap spreads tighten
- The ECB may have to resume rate cuts in 2027 on a persistent inflation undershoot
- Gilts extend post-Bank of England meeting gains as March rate cut expectations build
- Japan stocks advance on expectations of LDP lower-house victory
- Indonesian assets tumble after Moody's outlook downgrade
- Banxico pauses rate cuts amidst a higher-than-expected core inflation trajectory
A Week of Rotation in Equity Markets
The market’s rotation out of tech stocks continued this week amid concerns over stretched valuations and heavy AI-related spending. The tech-heavy Nasdaq index suffered its biggest 3-day slump since April last year. In contrast, several non-technology sectors, including energy, healthcare, and financials, profited from the ongoing rotation out of tech stocks. Euro area and Japanese stocks outperformed US equities while some EM equities also continued their ascent. However, some of these gains reversed later in the week as market sentiment deteriorated. A rebound in the dollar, alongside increased volatility in advanced economy equities and commodity prices tempered the risk-on momentum. In rates markets, the ECB and Bank of England kept rates unchanged, as expected, although the latter leaned dovish with a closer-than-expected vote split and greater focus on UK labor market weakness seen as somewhat of a surprise. Going forward, markets expect around 7 bps of easing by the ECB the rest of the year while expectations increased for a full Bank of England rate cut in April. Elsewhere, it was a volatile week for commodity markets, with the recovery in precious metals prices earlier in the week, reversing sharply on Thursday. Silver was a particular focus, plummeting 17% yesterday amid reports of speculative flows and thin liquidity.
