Javier Molina highlights that the market continues to show mixed signals: while the SP500 reaches new highs, weak economic data, tariff uncertainty, and rising inflation expectations create an environment of increasing risk and contained volatility.
Capital flows into European equities have rebounded after 19 weeks of outflows, but extreme positioning and low liquidity could amplify any negative movement, triggering accelerated sales.
In his opinion, this week investors should closely monitor the GDP and durable goods data in the U.S. (Thursday), the PCE inflation index (Friday), and Nvidia's results (Wednesday), which are key for the markets. In an environment of rising uncertainty, it's better to have the parachute handy.
A journey to historic highs and back to the origin, in an environment of increasing volatility. Warning for travelers as I fear an imminent threat looms over the path.
Economic data has been weak, new risks in tariffs have been registered, and major companies' forecasts have been less than encouraging. Nevertheless, the SP500 index reached two record closes this week, indicating that despite short-term setbacks, market optimism remains latent.
On the other hand, capital flows into European equities are accelerating notably. After nearly 19 weeks of outflows, European equity funds have seen significant inflows for two consecutive weeks, with the last being the largest since early 2022 (+4000 million USD). This shift, driven by the strong performance of European stocks compared to their global peers, suggests that investors are starting to reallocate capital towards a historically undervalued asset.
While it is true that money is entering from retail investors, there are inflows into retirement plans and stock buyback programs being executed, the market in general shows excessive positioning, with cash levels among fund managers at historic lows. This means that the level of investment in risk is at its maximum. This situation creates low liquidity levels that have kept volatility low. However, if any moment of 'fear' or negative movement in prices occurs, the risk of amplification is maximum, which would lead to accelerated sales and sharp declines with increased volatility.
Meanwhile, the inflation outlook adds an extra layer of concern. The final inflation expectations survey from the University of Michigan has raised the outlook to 3.5% for the 5 to 10-year horizon, the highest level since 1995. This increase evokes moments from 2022, when similar metrics drove significant rate hikes by the Federal Reserve, and raises concerns about a potential inflationary spiral if consumers start to bring forward their spending.
With that said and watching the elections in Germany, although positive signs are observed such as the highs reached by many global indices and the rebound in flows to equity funds, weak economic fundamentals, extreme positioning, and rising inflation expectations require a cautious investment strategy. Investors must be prepared to adjust their positions based on the evolution of the economy and monetary policy, as the environment, while optimistic at first glance, could become volatile due to unexpected changes. Now more than ever, don't forget the parachute and review how to activate it while we continue to enjoy the flight.
What to watch this week?
Macro Data to Watch:
Thursday, publication of the second estimate of GDP for the fourth quarter in the USA and the previous month's durable goods data.
Friday, publication of the January PCE index, the Fed's preferred inflation measure.
Relevant results:
Monday: Trip.com Group, Zoom Communications, and SBA Communications
Tuesday: Home Depot
Wednesday: Nvidia (key for the markets), Salesforce, and Stellantis.
Thursday: Vistra, HP, Warner Bros. Discovery, and NetApp.
This content is for informational and educational purposes only and should not be considered as investment advice or a recommendation. Past performance is not indicative of future results. CFDs are leveraged products and carry a high risk to your capital.
Investment in crypto assets is not regulated in some EU countries or the UK. There is no consumer protection. Your capital is subject to risks.
