The Cambridge Weekly- 16th February

The outcome surpassed even the own party’s expectations, and will allow Takaichi to enact her mandate’s economically stimulative legislation more easily than it otherwise would have. Equity markets soared when the results came out, with Japan’s Nikkei 225 rising as much as 5.7% last Monday. Bond markets were slightly more cautious; the price of 10-year bonds fell to the lowest level since 1999 on the back of expectations of increased government borrowing.

US equity funds focused on non-tech sectors having attracted a vast amount of capital so far this year, with Deutsche Bank estimating the inflows in the past 5 weeks having already exceeded the total for 2025. This reflects the shift in market sentiment in recent weeks, with investors growing increasingly cautious about stocks that are heavily reliant on the success of the AI build-out.

US Equity Market:
The US Bureau of Labor Statistics released its much-anticipated January jobs report last Wednesday. The headline figure came in much higher than analysts’ expectations; the world’s largest economy added 130,000 jobs last month, the strongest monthly gain since December 2024. The unemployment rate also fell to 4.3%, down from 4.4% in December. However, not all the data was positive. Last year’s payroll figures were revised heavily downwards, leaving 2025’s total count at just 181,000 – down from the 584,000 previously estimated. This revision, which was widely anticipated by markets, pins 2025 as the weakest year for US job growth outside of a recession since 2003.

The dominance of the Magnificent 7 in index returns, that we have seen over the past couple of years, appears to be fading away slightly. Eight out of the eleven sectors in the S&P 500 have risen since the beginning of the year, whilst technology, financials and consumer discretionary stocks have lagged behind. Small-cap stocks have also outperformed this year, with the benchmark Russell 2000 outperforming the Nasdaq 100 by over 10% since the start of January. Last week also saw the Dow Jones Industrial Average surge beyond 50,000 for the first time.

UK Equity Market:
There were further challenges to Keir Starmer’s leadership last week following the resignation of his chief of staff, Morgan McSweeney, last Sunday and director of communications, Tim Allan, last Monday. Though gilts fell initially, they rebounded last Monday afternoon as senior Labour Party figures offered their backing to Starmer.

The FTSE 100 showed mixed performance over the period, but finished the week to Friday up 0.74%, supported by gains in home builders and energy stocks. The index moved higher last Thursday despite the news that Q4 GDP growth came in slightly below expectations, at 0.1%. The UK’s trade deficit for goods also grew to its widest on record over the year, while services registered a record surplus.

Elsewhere, a £9.9 billion acquisition of Schroders by US investment manager Nuveen was announced last Thursday morning – launching Schroders’ share price up 30% on the news. The pound was trading at around $1.36 at market close on Friday.

Inflation, Interest Rates and Bond Markets:
Treasury yields jumped at the US January jobs report, with investors reigning in Fed rate cut expectations for 2026. The 2-year yield increased as much as 10 basis points to almost 3.6% last Wednesday, while the 10-year topped out at 4.2%. Futures market traders now price in just two rate cuts by December, with inflation data published at Friday’s close.

The UK 10-year yield reached 4.6% last Monday, following uncertainty surrounding Keir Starmer and his party leadership. Yields stabilised as the week developed, with improved internal support for the Prime Minister, settling the 10-year gilt just below 4.5%. Britain also moved closer to becoming the first G7 economy to issue sovereign bonds on the blockchain, following the Treasury appointing HSBC and law firm Ashurst to pilot digital gilts this year.

Tech giant Alphabet stepped up its borrowing spree to fund AI spending, as it began lining up banks to issue a rare 100-year sterling denominated bond. This would place them amongst the University of Oxford, EDF and the Wellcome Trust as the only other sterling century issuers.

What’s on the horizon
This week brings several more economic releases for the markets to digest. Japan GDP growth preliminaries were announced today, which will be followed by its inflation data on Friday. The UK unemployment rate is expected on Tuesday, with inflation the day after. Also announcing its inflation figures is Canada on Tuesday, while the US is set to round off the week with GDP and PCE (personal consumption expenditures) numbers on Friday.

On Wednesday, the meeting minutes from the Fed’s January meeting will be released, shedding further light on its rationale to hold rates in the 3.5%-3.75% range. Company earnings season also rolls on, with the likes of HSBC, Rio Tanto, Walmart and Alibaba all announcing quarterly earnings results.

Lots of markets will be closed this week as Chinese New Year celebrations kick off. Markets in mainland China will be closed all of this week, whilst several other Asian markets will observe single-day closures. In the US, markets are closed today for George Washington’s birthday.

The Cambridge Team

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Source of financial market data: MorningstarDirect.