Investors remain nervous that US President Donald Trump’s policies could lead to a US recession or even worse, stagflation. Upside surprises in US cyclical data, including the retail sales control data set as well as industrial production data, have alleviated investors’ concerns a little.
While markets will remain focused on US economic data, they are also looking to alternative investment destinations, which are supporting their portfolios and therefore sentiment. Legislation to alter Germany’s debt brake has passed the Bundestag and will likely pass the Bundesrat on Friday, leading to more spending on defence and infrastructure, which is boosting the appeal of European assets. China’s AI and technology boom is also buoying investor sentiment.
We expect the Fed later today to show that while there is more concern on the FOMC about the economy, that controlling inflation remains its main focus. This modest hawkish surprise could dent sentiment. Russia’s President Vladimir Putin rejected Trump’s ceasefire offer. Investors will be watching to see if Trump decides to ramp up pressure on the Kremlin via stricter sanctions and any counter-reaction by Putin.
Falling FX and equity market volatility as well as the outperformance of defensive stocks by cyclical stocks were the largest contributors to the decline in our Risk Index over the past week. Supporting the Index were higher gold prices as well as rising credit and sovereign-EM spreads.
So far in 2025, the AUD, USD and NZD have the strongest negative correlations with our Risk Index. The JPY, SEK, GBP and EUR have the strongest positive correlations with the Index.
