Markets this week were driven by geopolitical tensions, evolving interest rate expectations, and early signs of a rotation away from the dominant AI theme. Escalations in Iran contributed to short-term volatility and swings in sentiment, and economic data releases suggest interest rates may need to stay higher for longer, influencing investor positioning. While the AI investment story remains an important long-term driver, there are early signs of a broader rotation in equity markets as investors balance valuations, new IPO activity, and the impact of persistently higher rates.
In the US, last week’s Non-Farm Payrolls report pointed to a resilient labour market, with steady job creation and stable unemployment. Inflation data was broadly in line with expectations, although headline CPI reached its highest level in three years at 4.2% year-on-year. Together, these developments reinforce the view that central banks are unlikely to cut rates quickly. In Europe, the European Central Bank delivered a widely expected 0.25% rate increase, with markets now focused on next week’s decisions from the Federal Reserve, Bank of England, and Bank of Japan.
Fixed income markets have been relatively stable, with only modest movements in government bond yields, and credit spreads remain tight – although primary activity remained robust, highlighted by Amazon’s record-breaking bond issuance in the Canadian corporate market, underlining continued strong investor demand for high-quality corporate credit. Equity markets have been more volatile. US technology stocks came under pressure as interest rate expectations firmed, reflecting their sensitivity to higher rates. Geopolitical developments have also added to market swings across both US and Asian markets, but oil prices hit a near 2-month low on Friday as concerns for further escalation start to ease.
Overall, while markets remain driven by near-term headlines, the backdrop of resilient growth and ongoing investment continues to provide support.
