Global Risk Monitor: Week In Review – February 21

Key Facts:

• The S&P 500 (-1.7%), Dow Jones (-2.51%), and Nasdaq (-2.51%) fell this week amid tariff concerns and weak economic data. The Russell 2000 (-3.71%) and Dow Transports (-3.45%) underperformed, reflecting slowing economic activity.

• Nvidia (+18%) gained on AI demand optimism, a strong Q4 forecast (+72% YoY revenue), and Amazon’s $100B AI investment, while Tesla (-23% from peak) declined due to weak delivery forecasts, China competition, and concerns over Elon Musk’s DOGE involvement.

• Gold hit an all-time high ($2,954.69/oz), up 11.8% YTD, driven by safe-haven demand and central bank buying. Natural Gas surged 13% this week and 40% in February due to severe winter weather and a 10% U.S. tariff on Canadian energy.

• U.S. long-term inflation expectations hit 3.5%, the highest since 1995. Retail sales fell 0.9%, while consumer sentiment dropped 10% MoM, raising concerns about spending trends.

• Germany’s Feb 23 election may lead to “Debt Brake” reforms, increasing government spending. A pro-growth outcome could sustain the DAX’s 11.95% YTD rally, but coalition uncertainty poses risks.

U.S. Markets

• Major Indices Performance:
  • S&P 500: Declined 1.7% this week but remains up 2.2% YTD.
  • Dow Jones Industrial Average (DJIA): Fell 2.51% this week, reflecting concerns about tariffs and weaker economic data.
  • Nasdaq Composite: Dropped 2.51%, but remains positive YTD (+1.08%), buoyed by AI optimism despite recent pullbacks.
• Russell 2000: The small-cap index was hit hardest, falling 3.71% on the week, now down nearly 2% YTD. Weakness in growth-sensitive sectors and rate uncertainty weighed on performance.
• Dow Transports: Declined 3.45%, impacted by:
  • Weakening U.S. economic data, including a sharp drop in consumer sentiment.
  • Trade concerns, as new tariffs on China and proposed auto tariffs raised cost uncertainty.
  • Sector-wide airline selloff, with Alaska Air (-6.9%), United (-6.4%), and Delta (-5.9%) leading declines.
• Tesla (TSLA): After an 80% post-election surge, Tesla has now fallen 23% from its January peak of $439.75. However, it remains up 39% since November. Investor sentiment is shifting amid:
  • Weaker Q4 delivery forecasts and concerns over profit margins.
  • China competition fears, as BYD continues to gain market share.
  • Fallout from Elon Musk’s DOGE participation
• Nvidia (NVDA): Surged 18% this week, making it one of the top performers. Key drivers:
  • Optimism ahead of Q4 earnings (Feb 26), with expected revenue of $20.89B (+72% YoY).
  • Major AI investments from Amazon ($100B in AI infrastructure for 2025), boosting demand for Nvidia’s chips.
  • CEO Jensen Huang reassured investors that AI hardware demand remains strong, downplaying fears of rising competition from Chinese AI firms.
• Homebuilders ETF (XHB): Declined over 5% this week, driven by:
  • The National Association of Home Builders’ Index falling to a five-month low due to high mortgage rates and construction costs.
  • 25% tariff on Canadian lumber, increasing material costs for new homes.
  • Toll Brothers (-5.9%) posted disappointing earnings, leading to a slower construction forecast in high-inventory regions.

International Markets

• Europe:
  • STOXX Europe 600: +9.1% YTD, buoyed by lower valuations and strong earnings.
  • DAX (Germany): +11.95% YTD, ahead of the German federal election on Sunday.
  • FTSE 100 (UK): Reached an all-time high (8,807.44) this week.
• Asia:
  • Japan: Nikkei 225 fell 0.97%, hit, in part, by yen strength and rising Japanese government bond (JGB) yields (10-year at 1.35%) that signals potential tightening from the Bank of Japan.
  • China:
    • CSI 300 (+1.19%) and Hang Seng (+3.79%) surged on AI optimism and expectations of softer U.S. tariffs.
    • However, the property market remains weak, with home sales posting a double-digit decline.
• Russian Markets:
  • Russian stocks have surged 31.34% YTD, while the Ruble has strengthened 22%. Key drivers:
    • U.S.-Russia relations improved, following Trump-Putin negotiations on Ukraine.
    • Energy strength: Rising oil and gas prices boosted Russia’s trade balance.
    • Central Bank interventions: Currency sales helped support the Ruble.

Commodities:

• Gold: Reached an all-time high of $2,954.69/oz, up 2% this week and 11.8% YTD. Drivers include:
  • Geopolitical tensions (Russia-Ukraine, U.S.-China trade).
  • Central bank demand, with Goldman Sachs raising its target to $3,100.
• Natural Gas: Soared 13% on the week, 40% in February, due to:
  • Severe winter storms, increasing heating demand.
  • Supply disruptions, including halted Russian transit.
  • 10% U.S. tariff on Canadian energy, adding cost uncertainty.
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Economics

Domestic:

• Inflationary Expectations Surging:
  • U.S. long-term inflation expectations hit 3.5%, the highest since 1995.
• Federal Reserve Policy:
  • Fed Chair Powell reaffirmed a “higher-for-longer” stance on interest rates, delaying the next rate cut expectation into the summer.
  • The 10-year Treasury yield hit 4.66%, reflecting persistent inflation concerns.
• Consumer Spending Weakness Emerging:
  • Retail Sales fell 0.9%, marking the biggest decline in nearly two years.
  • University of Michigan Consumer Sentiment Index dropped 10% MoM, with a 19% plunge in durable goods spending sentiment on tariff concerns.
  • Walmart forecasted lower sales and profits for 2025 with the CEO announcing, “We have to acknowledge that we are in an uncertain time, and we don’t want to get out over our skis here.”

International Economy:

• Europe:
  • German Elections (Feb 23):
    • Debt Brake Reform: Potential fiscal easing could increase government spending on infrastructure and defense.
    • Market Impact: A pro-growth result could sustain the DAX’s rally, but coalition uncertainty remains a risk.
  • UK Inflation Rises to 3.0%:
    • Above 2.5% prior, delaying Bank of England rate cut expectations.
    • Wage growth remains high (5.9% YoY), complicating policy outlook.
• Asia:
  • Japan’s Inflation at 3.2% YoY:
    • Increases the likelihood of faster BoJ rate hikes.
    • 10-year JGB yields at 15-year highs (1.35%), tightening conditions.
  • China Mixed Inflation Trends:
    • CPI rose 0.5% YoY, signaling potential recovery.
    • PPI remains in deflation at -2.3% YoY, reflecting weak industrial demand.

Week Ahead

• Key Market Movers:
  • Nvidia Earnings (Feb 26):
    • Q4 revenue expected at $20.89B (+72% YoY).
    • Tech sector impact: AI-driven chip demand outlook remains key.
  • PCE Inflation (Feb 28):
    • Fed’s preferred inflation measure, with implications for rate cut timing.
• German Election Aftermath:
  • Debt policy clarity could boost European equities.
  • Coalition instability could create market volatility.

Conclusion:

Markets are navigating inflationary pressures, trade risks, and geopolitical tensions, while gold and energy remain strong hedges. The German elections and Nvidia’s earnings will be the most significant catalysts in the coming week.