The new norm: Stabilising global risk sentiment in a volatile market

Key highlights:

February 6, 2025: We’ve recently witnessed a stabilisation of risk sentiment following a tumultuous week marked by volatile price action. Despite the tech sector’s underwhelming earnings, the MSCI US index managed to eke out a modest gain of 0.4 per cent, buoyed by a broader rally across other sectors. This resilience in the face of disappointing tech earnings speaks volumes about the current market dynamics, where diversification across sectors seems to be paying dividends.

The week’s economic data provided a mixed bag of signals. The US ISM services data, which fell unexpectedly to 52.8 against a consensus forecast of 54.1, sent ripples through the financial markets. This decline in service sector activity led to a significant drop in US Treasury (UST) yields, with the 2-year yield softening by three basis points to 4.19 per cent and the 10-year yield dropping eight basis points to 4.42 per cent.

This adjustment in yields reflects a cautious optimism among investors, perhaps taking some comfort in the narrowing of the 10s2s yield curve, which tightened by another 6 basis points to 23 basis points. This movement in the yield curve suggests that while the market anticipates no immediate rate hikes, the long-term outlook might be less hawkish than previously thought.

Amidst this backdrop, the voices from the Federal Reserve, including Jefferson, Barkin, and Goolsbee, maintained a steady drumbeat of “no rush on rate cuts,” although Goolsbee struck a surprisingly hawkish tone, cautioning about inflation risks stemming from potential tariffs.

This nuanced shift in narrative was further complicated by comments from Treasury Secretary Scott Bessent, who indicated that the Trump administration’s focus on reducing borrowing costs would target the 10-year Treasury yields rather than the Fed’s short-term rates. This policy direction could have profound implications for long-term investment strategies and the broader economic landscape.

The US Dollar Index, reflecting these shifts in economic policy and investor sentiment, fell by 0.4 per cent, reaching its lowest point in over a week. This decline was partly due to receding fears of a global trade war, which also influenced currency pairs like USD/JPY, dropping from 154.50 to 152.50 after Japan reported stronger-than-expected wage growth, sparking speculation of another Bank of Japan rate hike.

Gold, often seen as a safe-haven asset, continued its bull run, climbing to a new high of US$2,865 per ounce. This surge was fuelled not only by the general risk-off sentiment but also by fears that higher tariffs might extend to precious metals and commodities imports from the UK and the European Union.

Conversely, Brent crude oil prices fell by 2.1 per cent after an EIA report highlighted an increase in crude oil inventories, adding to the overhang of geopolitical risks in the oil market.

Looking at the equity front, Asian markets took their cues from Wall Street, opening higher, while US equity futures suggested a positive start for American stocks, indicating a potential continuation of the stabilisation trend.

The week wasn’t just about traditional markets; significant strides were made in the digital asset space. White House Crypto Czar David Sacks announced that the first priority for the administration would be stablecoin legislation. This move comes at a time when stablecoins, despite their popularity mainly overseas, have yet to find a clear regulatory path in the US The establishment of a Crypto Task Force, with SEC Commissioner Hester Peirce at the helm, aims to carve out a regulatory framework that balances innovation with investor protection.

The task force’s agenda is ambitious but necessary. It seeks to eliminate the regulatory ambiguity that has long plagued the crypto industry, where businesses operate under the shadow of potential legal repercussions without clear guidelines. Commissioner Peirce emphasised in her statement that the SEC’s initiative isn’t an endorsement of any crypto asset but rather an effort to provide a regulatory environment that makes sense for crypto while safeguarding investors from fraudulent schemes. The focus on stablecoins is particularly pertinent, given their role in providing liquidity and stability within the volatile crypto market.

This regulatory push could potentially be legislated within six months, according to Sacks, which is a bold timeline considering the complexities involved. Yet, it signals a significant shift towards integrating cryptocurrencies into the mainstream financial system, recognising their potential while addressing the inherent risks.

In conclusion, this week’s market movements reflect a broader narrative of stabilisation amidst volatility, driven by economic data, policy signals, and geopolitical developments. The focus on stablecoin regulation could be a game-changer for the crypto market, potentially fostering an environment where digital assets can thrive under a clearer legal framework.

However, the journey towards such stability in both traditional and digital markets is fraught with challenges, requiring a delicate balance between fostering innovation and ensuring economic and financial integrity. As we move forward, the interplay between market sentiment, regulatory actions, and global economic policies will continue to shape our financial landscape in unpredictable but potentially rewarding ways.

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