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.
Geoff Yu
Time to Read: 12 minutes
For much of the week, it appeared that any sector facing even a modicum of “AI-disruption risk” saw a retreat from asset allocators. What began as a U.S.-centric story broadened, though by the end of the week Europe started to provide a buffer. On the face of it, economies with lower services exposures, such as the U.K. and continental Europe, supposedly have a larger moat against AI, but the holdings base and valuations also matter. In absolute terms, the U.S. has been outperforming so much, even among cross-border investors, that the bar for a correction was low, even if this wasn’t as broad-based as earlier in the month. In relative terms, markets have to face up to the fact that financial conditions, on balance, will likely tighten from here and raise discount factors for asset allocation.
U.S. data are now looking marginally more than benign, while pivots toward tightening are being highlighted outright in G10 economies such as Australia and Norway. In hindsight, the ability of tech companies to raise century-maturity GBP-denominated debt could mark the low point of easy financial conditions through the credit channel. Coupled with attempts at further fiscal stimulus from the Eurozone, Japan, China and most likely the U.S., yield curves and even policy rates will be next. Stabilizing equity markets will help keep global financial conditions “in a good place,” but we anticipate a period of market asymmetry: Sentiment will react adversely to upside shocks in price-related data, while anything simply “benign” should not expect a fulsome response in asset prices.
1) Rotation: Our equity flow and holdings data indicate that significant rotation has taken place on an industry group level between software and semiconductors. The latter industry group continues to benefit from expectations of secular growth and strong balance sheets, but it will be a challenge for U.S. markets to maintain gains on the basis of flows into a single industry group or a cluster of industries. Fed speakers will likely continue to increase their emphasis on reacting to the distribution of growth rather than aggregate figures.
2) European sentiment: “Hard power” realism is now the guiding principle of European defense policy. The spending uplift in defense is real, but the current effect is one of ensuring that forward orders and expectations indices (such as the ZEW and PMIs due next week) no longer decline, but expansion, which could structurally lift growth, is a different story. National leaders will likely return from the Munich Security Summit with new investment plans, but action must be front-loaded, especially taking advantage of the opening provided by a more cautious European Central Bank (ECB).
3) APAC spending: Market activity in Asia Pacific will fall materially over the Lunar New Year holidays, but consumer-facing companies in the region and globally (e.g., European luxury goods companies) will be looking at consumption patterns hoping that China can lead the region in turning consumption around. Credit data for January do not bode well for demand, but with Japan’s new government pledging fiscal loosening and China approaching the usual planning season for fiscal announcements, upside risks should not be discounted. Crucially, stronger CPI figures in the region will help lift real effective exchange rates, which we still see as the “healthiest” form of dollar weakness.
4) Carry trades: iFlow’s two main barometers for risk sentiment – iFlow Mood and iFlow Carry – have clearly peaked, but this doesn’t automatically point to a sudden reversal. Equity flows, even in the U.S., remain strong relative to developed market (DM) cash instruments, even if central banks are now more nuanced on their policy outlook. As mentioned above with respect to financial conditions, an acceleration in tightening to encourage higher cash flows is needed to truly cause a turn in risk. Meanwhile, FX carry trades have also peaked in holdings terms and on balance, high-yielding currencies are also facing their fair share of outflows. Latin American currencies are particularly exposed in this respect due to elevated holdings, meaning more politically painful hikes are likely essential to help avoid any form of disruptive unwinding.
EM software never had elevated holdings to contend with
EXHIBIT #1: SCORED HOLDINGS SINCE JULY 1, 2025: SOFTWARE AND SERVICES INDUSTRY GROUP
Source: BNY
Our take: The AI-disruption selloff in the Software and Services industry group (GICS Level 2) is clearly affecting equity holdings. Our figures show that, relative to the rolling 12-month average, DM holdings in this industry group have fallen by over 15% since the beginning of the year. This theme is not new, and we note that the initial selloff started in November, when fears of disruption were already gathering pace. The cumulative drop in the last four months is approaching 25pp, and there is no sign of stabilization.
In contrast, the same industry group in emerging market (EM) equities has gained by close to 25pp relative to the rolling one-year average holdings level, though this merely corrects a significant underweight position rather than anticipating any form of “AI immunity.” Investment is pouring into AI tools globally, though we acknowledge that the focus on industrial application rather than consumer-facing services in China and the region is a form of mitigation. This is largely due to differences in economic structure, where manufacturing is still moving up the value chain, and household services demand continues to disappoint as a share of GDP growth.
Forward look: The differences in performance for the same industry group in the face of the same theme underscore the differences between EM and DM index compositions and growth priorities. In addition, it underscores the gap in valuations and allocations.
As a share of global portfolios, overall EM allocations are already low, and the share of individual industry groups – even entire sectors – will be negligible compared with DM counterparts. Until the weightings imbalance is addressed, talk of rotation from DM to EM, be it in one industry group or on an index basis, is not realistic.
However, low weightings, comparatively more attractive multiples, and favorable exchange rates, especially in APAC, will likely support sustained improvement in allocations. The biggest test remains U.S.-led financial conditions adjustments. The most supportive element for EM – Fed easing expectations – may be approaching its limits in the face of any turn in U.S. data.
U.S.: More good data expected despite equity market wobbles
EXHIBIT #2: U.S. AGGREGATE DEMAND AND GDP
Source: BNY, Bloomberg
Our take: While equity markets continue to adjust to AI-disruption, the direction of the economy is also coming to the fore as data remain noisy. Our first read on Q4 GDP is due out on Friday, and hopes are high for more good news on the robustness of the economy. Consensus points to nearly 3% annualized growth – slower than last quarter’s 4.4%, but still a strong number – even in a quarter that included a 45-day government shutdown. To get a cleaner sense of the growth in aggregate demand, we like to look at real final sales to private domestic purchasers, which ignore the foreign trade sector, government spending and inventory accumulation. This more stripped-down measure has been much steadier and slightly more modest than the headline GDP number, growing at just around 3% annualized for the past several years.
On the back of an encouraging CPI report last week, personal consumption expenditures data will be released on Friday as well, and we’ll be looking for further progress on inflation.
Forward look: The week in North America starts out slowly, with a Monday holiday in the U.S. Things start off with the Empire Manufacturing survey for New York state on Tuesday, along with durable goods orders – a key gauge of capital investment activity. The TIC report on international capital flows in the U.S. will be published on Thursday, along with weekly jobless claims, which have been slightly softer lately. As far as the central bank is concerned, the Fed minutes are released on Wednesday. We don’t expect too much news to come from this report, given the rather innocuous outcome of the FOMC two weeks ago and a relatively event-free press conference.
Canadian housing and CPI data will be printed this week as well, and these releases could push the Bank of Canada (BoC) further toward easing territory, something that recent BoC speakers – including Governor Tiff Macklem – have indicated could come back on the table.
EMEA: Not losing sight of regional catalysts
EXHIBIT #3: IFO SURVEY, MANUFACTURING AND EXPORT BALANCE
Source: BNY
Our take: Almost a year ago, the Munich Security Conference was the first in a sequence of events that led to a comprehensive reassessment of Europe’s security stance. The EU and closer partners had to face the reality that “strategic automony,” or at least significant inroads in that direction, was now a necessity, and they pledged public-sector resources to that effect. Financial markets repriced in favor of fiscal stimulus, much of it targeted toward defense, and current holdings of European defense stocks remain at comparatively elevated levels, while German yields and short utilization of Bunds also reflect expectations for higher trend growth.
The challenge for Europe is that expectations and reality remain heavily mismatched. Growth rates continue to disappoint to the downside, and order books are not exactly burgeoning. The latest Ifo survey points to sustained declines in manufacturing and exports (Exhibit #3), which lay out a clear message for European industry: Public sector investment in one specific industry cannot sufficiently compensate for the loss of competitiveness against Chinese imports and ongoing weakness in domestic demand.
Admittedly, European manufacturing’s sensitivity to exports outside of the EU itself has always been somewhat overstated, which is why U.S. tariffs and weaker Chinese demand have not significantly impacted net export contribution to growth, a figure that is expected to fall to 1.5% y/y this year. There will be some upside risk to its contribution, however, as there are clearer signs of a trade détente with China, under terms that would limit disinflation risk.
Meanwhile, even with a more agreeable tone from the U.S. in Munich after a rocky start to the year, Europe should not treat any improvement as an opportunity to revert to form. Instead, it simply creates better conditions to accelerate domestic reform. Any other conclusion by the EU or national leaders after the conference will be seen as another opportunity missed.
Forward look: There are no central bank decisions in the week ahead, and we expect Governing Council members to adhere to the new guidance, whereby rate cuts are just as possible as rate hikes. This already represents a shift from the stance in December and clearly distinguishes the ECB from other G10 central banks, including the U.S., where policy expectations are moving in the opposite direction as data stabilize. Consequently, the final inflation figures in Germany and elsewhere in the Eurozone should confirm that upside inflation risk is easing.
Meanwhile, the ZEW Financial Market Survey is expected to show further improvement, but the current situation index is expected to remain deeply in contractionary territory. Preliminary February PMIs are also expected to show improvement, but Germany’s print is expected to remain in contraction for the 43rd consecutive month.
In the U.K., January labor market figures and inflation are expected to support the Bank of England’s dovish lean and ensure that the upcoming Monetary Policy Committee (MPC) decision is “live.” CPI is expected to fall sharply by 0.5% y/y to 3%, which would be the lowest figure in almost a year. Earnings growth is expected to fall slightly to 4.6% and with services inflation – for which earnings are a key input – expected to remain elevated at 4.3%, the MPC will likely acknowledge that current capacity for easing remains limited.
APAC: Resetting policy and price expectations in the Year of the Horse
EXHIBIT #4: CHINA PRODUCER AND CONSUMER GOODS PRICES
Source: BNY
Our take: It will be a quieter week across much of Asia Pacific due to the Lunar New Year holidays. Rather than wait for official data, we expect that consumer-facing companies will be tracking spending and travel patterns in real time for signs of a pickup in Chinese demand, both domestically and beyond. Expectations for material upside surprises in demand remain muted as China continues to struggle with a disinflation impulse. In this context, value barometers are far more important than volume equivalents. At 0.2% y/y, the inflation figures released last week remain subdued, and the country could ill afford sequential weakness given the very thin margins in place for positive price growth (Exhibit #4), a policy priority. Stronger demand would also present an opening for producers to lift prices, the lack of which has already become a geopolitical issue globally. Beijing’s decision to assign much lower final tariffs on EU dairy exports is a further sign of easing in Sino-EU trade tensions, indicating that the initial agreement on a minimum pricing framework for electric vehicles and the procession of European leaders visiting China are showing some results, however limited. Crucially, Beijing appears to be preempting renewed rounds of price wars within industry to prevent a new phase of “involution.” The holiday season tends to generate significant discounting to drive volumes, but the message is now becoming clear that this is not the right way to grow.
Elsewhere, Japanese inflation is expected to fall to 1.6% y/y for January, the lowest level in over three years. This is the last full-month inflation print before Sanae Takaichi’s landslide victory, and we expect a reset in expectations given the mandate’s focus on cost-of-living issues. However, markets will need clarity on how fiscal loosening will be balanced against inflation restraint, especially with attention turning toward the spring Shunto wage rounds, where RENGO, the Japanese Trade Union Confederation, is seeking a 5% hike for a third consecutive year. Japanese authorities are clearly pushing the “stronger JPY” narrative and, if reports are to be believed, have proactively enlisted U.S. help to realize such goals, but the Bank of Japan will also need to retain credible operational freedom in the meantime.
Forward look: Decisions from the Reserve Bank of New Zealand (RBNZ), Bangko Sentral ng Pilipinas (BSP), and Bank of Indonesia (BI) this week will yield different forms of guidance, as intra-APAC divergence on inflation expectations remains a pertinent theme. As quarterly sequential inflation hits 1% in New Zealand, tightening is in the cards, but we doubt that the language will be close to what has been observed in Australia, especially on the matter of “entrenchment in price growth.” While New Zealand faces similar productivity challenges, even the Reserve Bank of Australia has highlighted that output gaps in the country tend to open up more aggressively, and baseline potential growth is currently lower than historical levels, implying the economic buffer for significant tightening in financial conditions is not large. At 2.25%, there isn’t scope for significant carry inflows yet, but guidance along the lines of around 50bp for the rest of the year could help generate carry interest versus some European funders, which remain under significant pressure.
In contrast, the BSP is expected to cut to 4.25% as growth concerns continue to weigh on the economy, though inflation is not expected to fall aggressively. Having an adequate real rate buffer remains essential for EM FX stabilization, and PHP – which has highly cyclical balance of payments dynamics – is more in need of rate support.
BI is expected to continue asserting vigilance amid ongoing volatility in local assets. The recent 70% cut in nickel output at the country’s largest mine underscores the terms-of-trade challenges for metals producers despite the run-up in prices earlier this year. However, such a step can be seen as another tool to help support currency valuations – an administrative measure rather than direct intervention – and its impact takes time to feed through and is often overlooked initially.
We expect some stabilization in risk appetite in the week ahead.
However, with limited data and policy signs outside of Western Europe, the inflation debate is starting to turn, and asset allocation will need to be repriced accordingly, especially in fixed income and credit, which have not yet reacted as much as equities.
A steady adjustment in various sectors, led by secular themes such as AI and fiscal loosening, has helped smooth the path. However, the risks of a sharper pivot cannot be dismissed, even if policymakers will likely continue calling for caution.
Markets will be hoping for a benign PCE print akin to the CPI figure, lest inflation slip to the wrong side of the 3% handle in the U.S., as it is starting to do elsewhere. This will also matter for entrenched FX positions: EURUSD is already starting to turn, signaling a pause in near-term USD hedging flows. By extension, a turn toward more forceful selling among uniformly overheld high-yielders will mark the next leg of correction in currencies.
Central bank decisions
New Zealand, Reserve Bank of New Zealand (Tuesday, February 18): The RBNZ is expected to remain on hold at 2.25%, but as markets have steadily pivoted toward pricing in tightening while inflation remains stubborn. We doubt that there will be any change in language along the lines of the Reserve Bank of Australia (indeed this will be difficult to match anywhere). However, affirming a change in direction could help NZD realize richer valuations, though we expect the path to remain volatile given the nature of New Zealand’s policy cycles. Overall, the currency is also relatively underheld and could become an enticing position on the crosses, which the RBNZ can in turn encourage to limit gains in tradables inflation.
Philippines, Bangko Sentral ng Pilipinas (Thursday, February 19): We expect the BSP to continue its easing cycle with a further 25bp rate cut to 4.25%. In our view, downside risks to economic growth outweigh near-term upside risks to inflation. The BSP currently sees risk-adjusted inflation at 3.2% in 2026 and 3.0% in 2027, suggesting inflation remains manageable within the medium-term horizon. We expect the BSP to strike a neutral tone and emphasize that the policy path will remain data-dependent. Given lingering domestic political uncertainties and limited visibility on the timing of a growth rebound, we see risks skewed toward at least one additional rate cut in Q2 2026.
Indonesia, Bank of Indonesia (Thursday, February 19): We expect Bank Indonesia to keep its policy rate unchanged at 4.75%. While BI is likely to retain an easing bias, the bar for further rate cuts remains high. Notably, recent communication has dropped references to an “all-out pro-growth” stance, with greater emphasis instead on rupiah stability, including the possibility of very large FX interventions (versus earlier references to “bold” interventions). The policy focus remains firmly on improving credit and interest rate transmission. While average lending rates have eased modestly in February, they remain elevated at 14.4%, down from 14.8% in January.
Source: BNY
Source: BNY
