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What’s in this issue;
Markets softened this week as investors took profits from overheated AI trades and rotated toward defensives and value.
We break down what the pullback really means for long-term investors, why the Fed’s rate cut is accelerating a market rotation, and how rising expectations of a Bank of Japan hike could ripple through global bonds.
Plus: the $83bn Netflix–Warner Bros. battle, China’s stimulus pivot, record-high copper prices, Brazil’s 15% yield opportunity, and what to watch as three major central banks take centre stage next week.
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Weekly Movement - Heatmaps
Markets ended the week on a softer footing as enthusiasm around artificial intelligence gave way to profit-taking and valuation concerns.
In London, stocks erased early gains to finish lower, weighed down by weakness in heavyweight names and a more cautious global backdrop. Across Europe, shares also slipped as investors reassessed lofty AI expectations, with tech-linked stocks leading declines.
US markets mirrored the tone, with major indices closing lower as investors rotated out of high-flying AI names and into more defensive areas, signalling a broader pause in the rally that has driven markets for much of the year.
What this means for investors
This week’s moves suggest the market is entering a more selective phase rather than a full risk-off shift. AI remains a powerful long-term theme, but stretched valuations mean short-term pullbacks are likely, especially after strong runs.
Investors may benefit from staying diversified, balancing growth exposure with defensives and quality income stocks, and being patient rather than chasing momentum at elevated levels.
Short-term volatility looks set to persist, but for long-term investors, periods like this can create opportunities to add to high-quality names at more reasonable prices.
What is Moving the Markets This Week
Federal Reserve Action and Rate Cut Expectations: The US Federal Reserve's recent interest rate cut, coupled with a perceived "dovish" tone, has reassured investors and driven a rally, especially in interest-rate-sensitive sectors like small-cap stocks. Markets are now pricing in a higher probability of future cuts.
Rotation out of AI/Big Tech Stocks: Following some disappointing high-profile earnings (like Oracle and Broadcom) that raised concerns about near-term AI investment returns, there's been a noticeable rotation. Investors have been cycling out of the "Magnificent 7" big tech names and into lower-valuation stocks and small-cap equities.
China’s Stimulus: Based on China's annual Central Economic Work Conference, the nation has signaled it will heavily rely on fiscal stimulus to manage its economy in 2026. This strategy involves implementing a "more proactive fiscal policy," which includes maintaining a "necessary" budget deficit and high levels of government spending to shore up growth. The goal is to boost sluggish domestic demand and promote both consumption and investment, while also managing financial strains at the local government level. Policymakers have also committed to deploying flexible monetary tools, such as potential cuts to banks' reserve requirement ratios and interest rates, alongside the fiscal push, to help achieve stability and counter economic headwinds.
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Top Economic News This Week
Increased Expectations for Bank of Japan (BOJ) Interest Rate Hike
Context: Investors are anticipating a potential shift in Japanese monetary policy, with increased odds (futures markets pricing in a two-thirds probability) that the Bank of Japan will raise its benchmark interest rate at its upcoming policy meeting. This is driven by concerns about persistent inflation in Japan.
Market Impact: The anticipation of higher Japanese short-term rates has caused Japanese bond yields to rise sharply. This, in turn, has decreased Japanese demand for foreign bonds, contributing to higher bond yields in the United States and Germany. The potential disruption of the yen-carry trade is a significant global financial market risk being watched closely.
Things I’m Paying Attention To
Netflix Deal
This high-stakes media battle pits Netflix's board-approved deal for Warner Bros. against a hostile, all-cash bid from Paramount Skydance. Netflix's accepted offer is for WBD's studios and streaming assets (Warner Bros., HBO/Max) only, valuing the deal at $82.7 billion with a $27.75 per-share mix of cash and stock.
Days later, Paramount launched a surprise hostile takeover for the entire Warner Bros. Discovery company—including its cable networks (CNN, TNT, etc.)—with a higher, all-cash offer of $30 per share, giving it an enterprise value of over $108 billion. This sets up a battle where shareholders must choose between the board-approved, complex deal from the streaming leader and a simpler, more lucrative full-company cash offer.
From an industry perspective, many argue Netflix is the rightful custodian of Warner Bros.' historic IP (like DC and Harry Potter). As a young, vibrant company and the global streaming leader, Netflix is arguably best positioned to leverage the studio’s assets for the digital age through its global platform and technical expertise.
However, this level of consolidation faces severe antitrust scrutiny, given that it would combine two major streaming services, and has triggered pushback from unions and regulators concerned about market domination and the future of theatrical releases. Paramount's bid, by contrast, attempts to win on price and a potentially easier regulatory path.
Emerging Markets
Brazil: High-Yield Trade Secured
Rate Decision: Brazil's Central Bank (BCB) held the Selic rate at 15.00\% this week, resisting pressure to cut sooner despite easing inflation.
Investor Takeaway: This decision prolongs the high-yield opportunity. Local Currency BRL Bonds remain highly attractive due to the large interest rate differential (15.00\% vs. US Fed rates).
⛏️ Commodity Shock: Copper Hits Record High
The Move: Copper prices surged this week, closing at a record high of over \$11,600 per ton.
EM Impact: This is a major structural positive for commodity-exporting EMs.
Investor Takeaway: Look to Materials and Mining stocks in key producers (Chile, Peru) as high metal prices drive stronger corporate earnings, fueled by global green transition demand (EVs/renewables).
🇨🇳 China: Tech Resilience vs. Property Drag
The Divergence: Latest data confirms polarisation: the Services Sector is holding up, while manufacturing data remains constrained.
The Investment Trade: Investors must be selective. Avoid broad exposure and focus strictly on high-growth segments like the AI supply chain (Semiconductors, specific hardware). Technology is now the largest sector in the MSCI EM Index, underlining its strategic importance.
Looking Forward: What We Anticipate Next Week
Policy dominates markets as three major central banks deliver interest rate decisions, setting the tone for FX, bonds, and equities.
China kicks things off (Monday):
Industrial production is expected to rise to 5.4% YoY (prev. 4.9%).
Signals improving manufacturing momentum and firmer global demand.
Rate decisions in focus (Thursday–Friday):
Bank of England: Markets expect a 25bp cut as inflation stabilises and growth softens.
European Central Bank: Likely to hold rates, maintaining a cautious, data-dependent stance.
Bank of Japan: Wage growth has markets leaning toward a 0.25% hike, potentially lifting rates to their highest level since 2008.
Earnings wrap-up:
Final large-cap reports from Micron Technology, Nike, Accenture, FedEx, and FactSet offer late insight into consumer demand, enterprise spending, and global trade.
ICYMI
The Big Story: Rate Cut and Rotation
The Fed Delivered: The Federal Reserve cut its key interest rate by 25 basis points (to 3.50\%-3.75\%) on Wednesday, confirming market expectations for monetary easing. This was the third cut since September.
Investor Impact: The cut immediately boosted risk appetite but signaled the path for future cuts remains uncertain due to dissent among policymakers and sticky inflation.
The Great Rotation: Following the Fed's move, a significant rotation accelerated. Investors took profits from expensive, high-flying AI stocks and shifted capital into cheaper, high-quality companies and value sectors (like Small-Caps, Real Estate, and Health Care).
Market Effect: This profit-taking caused the Nasdaq and S&P 500 to pull back from recent record highs, signaling a broadening of market leadership beyond the "Magnificent 7" tech giants.
What Else is Happening?
Geopolitics & Minerals: Global powers are accelerating efforts to secure critical mineral supply chains (Rare Earth Elements). This is driven by both the Energy Transition and the AI boom, making resource security a national priority.
Investor Takeaway: Look for investment opportunities in companies operating in politically stable jurisdictions with strong government contracts in the Mining and Materials sectors.
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