Start of the Week previews activities across global financial markets, providing useful charts, links, data and a calendar of key events to help with more informed asset allocation and trading decisions.
Bob Savage
Time to Read: 12 minutes
EXHIBIT #1: USD AND 2Y RATES
Source: Bloomberg, BNY
Key macro themes this week include Trump’s tariffs, planned for April, on chips, lumber, drugs and autos and Ukraine peace talks. New concern as the latest University of Michigan consumer survey shows consumer sentiment at a 15-month low and a lower outlook for Walmart in 2025. US polls point to discontent with Trump economic policy. Greater focus over the next week on politics, this time in the EU as Germans vote. Focus will shift back to AI and risks of peak pricing as Nvidia prepares to announce earnings, along with monthly pruning of new long positions in EU and China shares. Gold and its relationship to US fiscal and global fiat FX fears is also a focus with metals reaching record highs even as US Treasury Bessent plays down revaluing US reserves. The discussion of a Mar-a-Lago accord for US debt and the USD has inspired some US curve flattening and dollar selling this week, which should continue given US bond supply ahead. Also significant for the week ahead is the role of deregulation and what it means for shares with a keen focus on financials, which suffered this week. Emerging markets will be watching the central bank decisions in South Korea, Israel, Hungary and Thailand.
Our take
This week our iFlow Mood index was in extremely negative territory and global shares were lower – but still up on the month and year. Equities continued to focus on Chinese technology, with Alibaba beating earnings, while European defense spending is expected to increase, driving Euro STOXX to record highs. The US was mixed with blue chips lower – DJIA was off, but NASDAQ was up. Walmart’s outlook left many worried about US consumers ahead.
In fixed income markets, trading proved choppy, with the US focused on corporate supply – with $52.3bn in IG issuance – and rate locks against ongoing supply disruptions as debt ceiling limits reduce bill issuance. The US focus was also on FOMC minutes, as the Fed seems set to end quantitative easing following Congressional debates on fiscal policy and debt limits. Weaker EU data supported a modest rally for EU bond rally, with the German Bund key headed into the election, while Australian bond selling was notable despite RBA’s cut. Our data show EM divergence, with Hungary, Argentina and Poland bond buying against China, Indonesia and Malaysia selling.
In FX markets, USD dropped again, driven by JPY, as BoJ failed to act as bond yields rose. The 10y yield in Japan in now nearing 1.50%, with support from cross-border purchases of Japanese government bonds. EUR was also weaker on the German election risk and mixed data, with flash PMI reports disappointing. UK markets also troubled as higher budget deficits, weaker manufacturing, higher CPI and stronger retail spending cast doubt on BoE easing. In Asia, RBA cut 25bp, but Australian easing expected to slow. Meanwhile, RBNZ cut 50bp, but seen nearing end of cycle. Both AUD and NZD improved. In EM, KRW, COP, PEN gained, while TRY, HUF and IDR fell. Carry trades aren’t working in our iFlow, but neither does momentum. The USD and its correlation to rates are changing. The next week will test this shift. Our flows show that the correlation of sovereign bond flows to the USD was negative in February but bottomed out, rising from -0.75% to current -0.45% – following a short-lived spike to +0.15% in the first week of Trump’s term. The 2y yield vs. the USD index shows a breakdown over the last year with the election shift.
EXHIBIT #2: EQUITY AND FX FLOWS IN EUROZONE
Source: BNY
German elections and Europe
As expected, exit polls put the CDU/CSU in pole position to form the next German government, with Friedrich Merz most likely the next chancellor. The AfD also looks set for its best-ever results but will not be part of the new government. The seat distribution will take place over the coming days before the hard yards of coalition talks commence. It is in Europe’s interest to see the process concluded as soon as possible. As we highlighted in our election preview last week, no matter the composition of the next government, moving away from fiscal restraint to ramp up public investment is the policy imperative. Even though priorities have shifted of late in favor of defense, there will be positive demand impulse and associated productivity gains. We doubt there will be enormous differences in the general direction of travel for Germany’s fiscal outlook, but if the CDU/CSU’s coalition partners can advance direct spending gains rather than prioritize efficiency gains first, which is Merz’s preference, markets will favor any acceleration in fiscal expansion.
Our take: EUR faces some downside risk. iFlow indicates our macro and equity clients are clearly pricing in these positive risks. EUR has been the best-performing currency over the past month among the majors, though it could be subject to some month-end rebalancing risk. Meanwhile, we have seen equities in the region advance sharply as well over the past month (see Exhibit #2). Such total return flows into major markets are rare and sustaining them will depend on election results helping to realize the shift in expectations. European equities have come quite far in narrowing the holdings gap versus the US, but the harder yards are ahead: if there isn’t any meaningful shift in potential growth expectations – which a rise in investment is intended to achieve – a material pullback is highly possible, especially if trade and geopolitical uncertainty continues to rise.
EXHIBIT #3: EQUITY HOLDINGS
Source: BNY
Month end rebalancing
Barring extreme reversals, it is already evident that month-end rebalancing will be heavily impacted by exposures in equity markets. While the re-rating in European and Chinese markets has come through from unexpected drivers, and the long-term implications remain to be seen, the gains have significantly eroded US exceptionalism in equities, which should be seen as relatively healthy for asset allocation and better diversification of global portfolios. It is too early to fundamentally alter long-term capital market assumptions which would lead to adjustments in rebalancing needs, but we also stress that an investment drive in Europe focused on defense and AI-based development in China are both designed to lift trend growth rates, which will alter return profiles over the longer term if the plans are realized.
Our take: For end-February rebalancing, we believe the bulk of the flows will be centered on Europe. As of the final week of the month, SEK and EUR are the best-performing currencies in G10 on a flow basis, while CEE currencies such as HUF and PLN have also performed well. This speaks to the entire European industrial supply chain finding better support, though on a currency basis SEK and EUR have been recovering from underheld levels as funding currencies, while PLN and HUF inflows point to some stabilization in the carry. Based on the combined equity returns and realized FX flows, we expect significant reversals in EUR, SEK and CHF. EUR holdings among cross-border investors remains close to extremes so we would manage expectations regarding how much downside pressure rebalancing can generate. Bond markets have been choppier in recent weeks as growth fears and security matters were offset by stubborn inflation globally and a clear reluctance by central banks to add to easing paths. Combined with realized FX flows, signals are relatively weak, but we anticipate some recovery flow in NZD and NOK, mostly due to losses on FX without being offset by duration gains.
EXHIBIT #4: TERM STRUCTURE OF UST FLOWS
Source: BNY
U.S. fiscal policy and the ides of March
Tariff risk, prevalent in the markets since at least January 20, is about to be joined by a US fiscal policy discussion as a major focus. The ongoing Congressional debate about deficits, the debt ceiling and Trump tax cut plans has also seen a discussion of a Mar-a-Lago accord, where longer duration bonds are bought by nations with significant US exports. Capping US rates and spurring growth remains a key focus for the Trump team. A new spending package needs to be in place by March 14, or else the government will shut down. Of course, included in any new proposed fiscal package will be extensive changes to tax and spending priorities. Extending the 2017 tax cuts (which expire at the end of this year) will be a key objective of the new administration’s policy.
The House of Representatives is pinning its strategy on the reconciliation process, which aims to package everything into “one big beautiful” bill, while the Senate has initially indicated it would like to pass separate spending packages, rather than the House’s approach. The House proposal pitched on Wednesday last week, and rhetorically supported by the President, sees $.45trn in tax cuts over the next decade, $1.5trn in still unspecified spending cuts, meaning a $3trn deficit over the ten years through 2035. This would require – to be included in the House’s reconciliation package – a debt ceiling increase of $3trn.
Our take: Cross-border buying of US debt matters and is at risk if debate extends. The discussion of a Mar-a-Lago accord is important to the market countering ongoing debt worries. We expect the debate to heat up this week, and into March – keeping in mind the March 14 deadline – as this will join the tariff discussion as front and center in the markets.
EXHIBIT #5: KRW AND KOSPI
Source: BNY
Bank of Korea easing needs and worries
Since the previous meeting on January 16, 2025, South Korea data have been mixed. South Korea sentiment continues to improve but not fully reversing the political turmoil of December. Composite BSI (CBSI) for all industries March outlook rose to 88.0 (vs. actual February: 85.3). Manufacturing and non-manufacturing CBSI March outlook both improved to 91.1 (the most since October 2024: 94.3), and 85.8 (December 24: 90.8), respectively. The Economic Sentiment Index (ESI), which incorporate both consumer and business sentiment, rose +3.5pts to 90.2 in February vs. 86.7 in January, or the highest since November 2024 at 93.0. This confirmed that the political-related drag is behind us, but it is not completely out of the woods as the slowdown in economic growth remains a concern.
South Korea inflation ticked up above 2% inflation target to 2.2% y/y in January 2025, driven by higher crude oil prices. The other financial stability factor to consider is the renewed accumulated of debt. South Korea’s household credit reached an all-time high in Q4 2024 at KRW 1927trn or 2.2% y/y. The renewed higher house prices in Seoul are a source of concern, but unlikely to be sufficient to sway the BoK from continuing its easing plans.
Korean won was one of the key considerations for BoK in January, where BoK explicitly commented that FX uncertainties as one of the reasons for a pause. USDKRW remains elevated in absolute terms, but the 20won move lower since January meeting should provide sufficient comfort for BoK to ease at the forthcoming policy meeting. USDKRW last at 1435, below the key 1440 technical levels, but still higher than 1428 high on December 3, 2024, following the martial law saga.
Our take: We see the central bank resuming its easing plans with a rate cut of 25bp to 2.75% at its February policy meeting with downward revision of macro forecast. We expect BoK to remain in a moderately dovish stance that leaves the option for further cuts but at the same time highlights the importance of fiscal measures as an additional boost to economic growth and sentiment. Indeed, the latest BoK report suggest that South Korea’s key industries, including semiconductors, automobiles, and steel are expected to face simultaneous downturns with bleak outlook.
The week ahead could change the narrative for investors from wait-and- see to a more defensive view of the US. The cracks in the US exceptionalism trade are showing up in consumer mood shifts, but the effect on the real economy is not clear. Chasing momentum into month-end has never been a winning strategy, but the drop in volatility in fixed income and equities despite significant uncertainty also defies logic. FX markets have been on the front lines of worry and EUR may be the key focus of markets given the German election, but the risks of tariffs and what that means for Canada and Mexico will also likely be important. The role of cash as an asset class in and of itself remains in play as it provides the tactical nimbleness required to navigate both monetary, fiscal and trade policy shifts ahead.
Central bank decisions
Israel BoI (Monday, February 24) – No change is expected from the BoI, but markets will be looking for any further suggestion that easing is on the horizon. However, in January the BoI was clear regarding ongoing supply constraints and other points of economic normalization are required before the path clears for a new phase in the cycle. Sequential inflation has already recovered strongly in January to 0.6%m/m, though data indicate growth in Q4 was far softer than expected at 2.5% annualized.
South Korea BoK (Tuesday, February 25) – Our view is for the BoK to resume easing with a 25bp to 2.75%, in addition to a downward revision in their macro forecast. We expect the BoK to maintain a moderately dovish stance and leave the door open for further cuts. However, they will also need to highlight the importance of fiscal measures as an additional boost to economic growth and sentiment. Indeed, the latest BoK report suggests that South Korea’s key industries, including semiconductors, automobiles, and steel are expected to face simultaneous downturns amid a bleak outlook.
Hungary MNB (Tuesday, February 25) – Like peers in the region, the MNB is expected to keep rates on hold while price pressures remain elevated. Annualized inflation rebounded sharply to 5.5%, led by a 1.5%m/m gain in January. Wage growth remains close to double digits and the current priority is to assess whether monetary policy is sufficiently restrictive. Recent geopolitical developments in the region have led to strong inflows into local asset markets on account of industrial demand-based repricing, but we note the situation is complex and the flows are too concentrated.
Thailand BoT (Wednesday, February 26) – On balance, our view is for the BoT to maintain the status quo 2.25%. We expect the BoT to maintain a dovish tone, with further easing a clear option. Note that the BoT removed the “neutral” reference in December meeting. Thai inflation is currently experiencing upward momentum with headline at 1.32% y/y, from the 0.35% bottom in August 2024 and the highest since 1.54%y/y in May 2024. Core inflation also made new recent highs at 0.83%y/y. Inflation is low in absolute terms, but the upward trajectory could be a concern.
Source: BNY
Source: BNY
Source: BNY
Source: BNY
Source: BNY
Source: BNY
