Markets between love and fear

In February, the markets have shown that love is in the air: despite new tariff announcements, inflation risks, and the DeepSeek shakeup, positive market sentiment continues to prevail. In Europe, equities reached new all-time highs, and in the US, there is evidence of a broadening equity rally, as the dominance of the Magnificent Seven may be starting to fade. However, uncertainty remains at extreme levels, with renewed fears emerging following the higher-than-expected January CPI, which recorded its fastest increase in a year and a half, and some weak US economic data. To assess whether the current environment of positive market sentiment can continue, we focus on the following themes:

• First, inflation is the dominant concern, as the market remains highly sensitive to it, which could pose a significant challenge for Trump. Recent consumer surveys highlight growing uncertainty, with long-term consumer inflation expectations surging to 3.3%, the highest since 2008, with the highest dispersion since the 80s.
• Second, global growth is set to stabilise as inflation gradually declines, but policy uncertainty under Trump adds risks.
• Third, the Eurozone is supported by a clearer ECB policy path. Fiscal support in Germany following the elections and a possible increase in defence spending are key themes to monitor. 
• Finally, China remains focused on avoiding a disruptive trade war, as evident in its measured response to Trump’s tariffs. 

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