Authored by Lance Roberts via RealInvestmentAdvice.com,

For Part 1 on “Tariff Risk” read: Tariff Impact Not As Bearish As Predicted.

In “Trumpflation” we discussed why the tariff risk was not inflation. To wit:

“Today, globalization and technology give consumers vast choices in the products they buy. While instituting a tariff on a set of products from China may indeed raise the prices of those specific products, consumers have easy choices for substitution. A recent survey by Civic Science showed an excellent example of why tariffs won’t increase prices (always a function of supply and demand).”

Of course, if demand drops for products with tariffs, prices will fall, reducing inflationary pressures. Furthermore, the tariff risk is not a one-sided event. If Trump tariffs Chinese, European, or Canadian products, those countries tend to enact counter-balancing tariffs on U.S. products. Such slows demand for goods and services between all parties, again a deflationary process.

But therein lies the real tariff risk investors should focus on- the corporate profitability risk.

How We Got Here

Corporate profit margins in the U.S. are at historic highs, with S&P 500 companies enjoying levels well above their long-term exponential growth trends.

Post-pandemic demand surges, supply chain disruptions, and massive fiscal and monetary interventions supported those elevated margins. As evidenced by the chart below, the correlation between economic growth rates and corporate profits is high. Note that outliers of the correlation are historically related to events such as the “Financial Crisis” and post-recession economic recoveries.

However, as the economic landscape shifts, several factors threaten to erode these profit margins, which should raise concerns for investors.

Pandemic-era stimulus measures played a critical role in boosting corporate profits. Trillions in fiscal and monetary support created robust demand, while low interest rates reduced borrowing costs. Businesses capitalized on supply chain disruptions, passing increased costs to consumers with little resistance. At the same time, industries like technology and healthcare benefited from market consolidation, strengthening their pricing power. Labor costs also lagged behind inflation during this period, helping businesses maintain wide margins.

However, these conditions are now waning. As economic growth slows, supply chains normalize, and inflation moderates, sustaining high profit margins will become more challenging.

Such is particularly the case when it comes to tariffs.

Tariff Risk On Corporate Profits

Corporations react to cost increases in their business (i.e., wages, benefits, commodities, utilities, etc.), which must be factored into the selling price to maintain profitability. Crucially, corporations can only pass on higher input costs to consumers if demand remains higher than the available supply of those goods or services.

In 2020 and 2021, corporations could pass on most of the inflationary increase to consumers as they were willing to spend the Government’s money. However, as excess savings run out, inflation declines as consumers decrease spending; corporate profits weaken as the ability to pass on higher input costs to customers fades. As shown, as inflation declines, the rate of change in corporate profits also weakens.

We see the same if you use a two-year average of corporate profits minus inflation. Again, when inflation surged in 2020, corporations could pass on the bulk of the cost increases to consumers. Today, as inflation slows due to declining demand, corporations must absorb the inflation to sell products or services.

Another way to view this issue is by comparing the spread between the consumer price index (what consumers pay for goods and services) and the producer price index (what corporations pay). When inflation rises and consumer demand exceeds supply, corporations can pass higher input costs to consumers. However, when inflation declines, corporations must absorb higher input costs due to slower demand to sell products or services.

Here is the crucial point:

“Corporations don’t create inflation. They merely react to changes in demand and adjust pricing and supply to maintain profitability. When the consumer slows down, corporations cut prices to reduce supply.”

While many risks, such as high labor costs, increased borrowing costs, slowing economic growth, and tax policy risks, threaten corporate profitability over the next few years, tariff risk is often overlooked.

“The narrative in markets is that the outlook for the US is great, and the outlook for Europe, UK, and China is not good. For markets, the problem with this narrative is that 41% of revenues in the S&P 500 come from abroad. If we have a recession in Europe and a continued slowdown in China, it will have a significant negative impact on earnings for S&P 500 companies.” – Torsten Slok, Apollo Academy

One of the risks the Trump administration faces by imposing tariffs is the negative impact of tariffs on exports. Tariffs are an additional tax on imported goods, increasing the costs of those products. However, as noted above, tariffs are never in isolation, as the countries we impose tariffs on will likely impose tariffs back on the U.S. This “tit-for-tat” process threatens to raise costs on exports to countries already impacted by the purchasing power differential caused by a strong dollar. The chart below shows net corporate profit margins during the previous Trump-era tariff policy. Logically, given the high corporate revenue derived from international sales, investors should expect that any cost increase will immediately impact profitability.

With this potential tariff risk in mind, what are the implications for investors in 2025?

Implications for Investors

As always, the problem facing investors is the timing of when the impacts of economic, political, or regulatory changes occur. Sometimes, those impacts can be immediate, such as a reduction in corporate tax rates; other times, the effect of a political or regulatory change can take much longer to manifest.

However, given the exceptionally high profit margin levels in an environment where employment growth is declining, tariff risks are increasing, and economic growth is slowing, being somewhat cautious about specific market exposures may make sense. The chart below shows the long-term relationship between employment growth (where wages and economic demand come from) and corporate profitability as a percentage of the economy.

So, what should investors do? One step would be to monitor portfolio holdings with an exceptionally large foreign revenue exposure. Below is a table of notable S&P 500 companies with substantial international revenue exposure. (Note: The percentages of revenue from international sales are approximate and based on available data as of 2023. Current P/S and P/E ratios are subject to change based on market conditions and company performance.)

Furthermore, investors should adopt a proactive and diversified strategy. The following steps can help mitigate these risks:

1. Focus on Resilient Sectors: Certain industries, such as utilities, consumer staples, and healthcare, are less sensitive to tariff risks due to consistent demand. Allocating a portion of the portfolio to these sectors can help offset volatility in other areas.

2. Evaluate Profit Margin Trends: Rising costs, slowing demand, and tariff risks pressure high corporate profit margins. Investors should analyze companies’ ability to maintain profitability amid these challenges. Companies with efficient cost structures and strong pricing power are better positioned to weather such conditions.

3. Hedge Against Currency Risks: A strong dollar can compound the negative effects of tariffs by making U.S. goods more expensive abroad. Investors can consider hedging strategies or exposure to companies that benefit from a strong dollar.

4. Adopt a Long-Term View: While tariff policies may create near-term uncertainty, investors should focus on long-term fundamentals. Maintaining a disciplined investment strategy and avoiding reactive decisions based on short-term market volatility can lead to better outcomes.

While I have no idea whether tariff risk will threaten corporate profit margins with certainty, the data suggest that risks exist. As we proceed into 2025, the risk of markets reversing to realign prices with valuations seems increasingly likely.

We suggest that becoming more cautious may pay more significant dividends later this year.

*  *  *

For deeper insights into managing your investments in today’s volatile market, visit RealInvestmentAdvice.com for expert guidance and actionable strategies.

Apple has elected to remove its most advanced, end-to-end encrypted security feature for cloud data in the United Kingdom after the government ordered the company to build a backdoor for accessing customer data.

On Friday, Apple announced that Advanced Data Protection, a stronger form of end-to-end encryption used on a wide variety of user data, is no longer available in the UK for new users. This affects iCloud data storage, device backups, web bookmarks, voice memos, notes, photos, reminders and text message backups, Bloomberg reports.

“We are gravely disappointed that the protections provided by ADP will not be available to our customers in the UK given the continuing rise of data breaches and other threats to customer privacy,” Apple said in a statement. “ADP protects iCloud data with end-to-end encryption, which means the data can only be decrypted by the user who owns it, and only on their trusted devices.”

Two weeks ago reports surfaced that the UK government had ordered Apple to build a backdoor into customer data globally – which Apple said was “unprecedented overreach by the government,” which the company said meant that “the UK could attempt to secretly veto new user protections globally preventing us from ever offering them to customers.”

I actually wrote about this for ZeroHedge last week.

Should’ve listened to me, UK govt.https://t.co/TeLUy2y1zc https://t.co/0hF5IlTf1a pic.twitter.com/Nq4ZRkEdZr

— Preston Byrne (@prestonjbyrne) February 21, 2025

Customers in the UK who are currently using ADP in the UK will need to manually disable it during an unspecified grace period in order to keep their iCluod accounts, while the company says it will issue additional guidance to affected users.

This would have happened in America if President @realDonaldTrump had not won https://t.co/RMTueGaCaY

— Elon Musk (@elonmusk) February 21, 2025

According to Bloomberg, pulling the encryption feature rather than building a backdoor is a “clear rebuke of the government’s order.” That said, it may not satisfy UK regulators.

Apple on Friday said that “enhancing the security of cloud storage with end-to-end encryption is more urgent than ever before” and that it “remains committed to offering our users the highest level of security for their personal data and are hopeful that we will be able to do so in the future in the United Kingdom.”

The move to pull its most secure encryption technology in the region appears to be an effort from the iPhone maker to appease UK regulators, though it’s plausible the government will determine the company isn’t going far enough. “As we have said many times before, we have never built a backdoor or master key to any of our products or services and we never will,” Apple said. -Bloomberg

UK users who attempt to enable ADP will receive a message on their device that says “Apple can no longer offer Advanced Data Protection (ADP) in the United Kingdom to new users.”

As part of its order to Apple, UK authorities demanded access to global user data, and required the company to provide access under the country’s Investigatory Powers Act – a law which grants the government power to force companies to remove encryption under a “technical capability notice.”

The law also makes it illegal for companies to announce when the government has made such a demand.

Crypto prices tumbled this morning – most notably BTC and ETH – on reports that cryptocurrency exchange Bybit has reportedly been hacked for over $1.4 billion in liquid-staked Ether and MegaETH (mETH).

The sudden downturn liquidated roughly $100 million worth of leveraged derivatives trading positions, overwhelmingly longs anticipating prices to rise, CoinGlass data shows.

As Vince Quill reports for Cointelegraph.com, following the incident, the onchain security analyst ZackXBT warned users to blacklist addresses associated with the hack. Bybit co-founder and CEO Ben Zhou also provided an update on the security breach.

Zhou confirmed that a transfer was made from the exchange’s multisignature wallet to a warm wallet approximately one hour prior.

The CEO said the specific transaction was masked to appear legitimate but contained malicious source code designed to alter the smart contract logic of the wallet and siphon funds. Zhou reassured customers:

“Please rest assured that all other cold wallets are secure. All withdrawals are NORMAL. I will keep you guys posted as more develops. If any team can help us to track the stolen fund will be appreciated.”

The incident follows several high-profile hacks and security incidents throughout 2024 and early 2025 that left crypto exchanges drained of funds.

The crypto industry experienced an uptick in hacks and scam-related activity in the first several weeks of February 2025.

Bybit ETH multisig cold wallet just made a transfer to our warm wallet about 1 hr ago. It appears that this specific transaction was musked, all the signers saw the musked UI which showed the correct address and the URL was from @safe . However the signing message was to change…

— Ben Zhou (@benbybit) February 21, 2025

“Bybit is Solvent even if this hack loss is not recovered, all of the client’s assets are 1 to 1 backed — we can cover the loss,” the Bybit CEO added in a separate post.

In an X statement, the exchange assured that its cold wallets “remain fully secure.” “All client funds are safe, and our operations continue as usual without any disruption.”

Bybit detected unauthorized activity involving one of our ETH cold wallets. The incident occurred when our ETH multisig cold wallet executed a transfer to our warm wallet. Unfortunately, this transaction was manipulated through a sophisticated attack that masked the signing…

— Bybit (@Bybit_Official) February 21, 2025

Elon Musk is no stranger to using physical props to make a point – After his purchase of social media giant Twitter, which shocked the political left to their core, he famously entered corporate headquarters on day one with a bathroom sink in his hands.  “Let that sink in” became a mantra and a meme as Musk proceeded to fire around 80% of the bloated leftist company’s staff without any visible decline in operational ability. 

Musk proved a common conservative conspiracy theory correct:  That Twitter was a corporate monstrosity which employed thousands of people whose only job was to censor views and information contrary to the woke establishment.  No website needs 7500 staff members to function; 80% of the workers were only useful as long as the censorship apparatus was in place.

Much like old Twitter, the federal government is also a bloated, festering edifice that needs to to be cut down into a more manageable and far less corrupt structure.  One political leader that has experience with this process is Argentina’s new president, Javier Milei.  

The day Javier Milei was sworn in as president he shuttered 13 ministries and fired over 30,000 government bureaucrats.  Argentina’s economy has been a train wreck for almost three decades due to socialist mismanagement and out of control debt spending.  The country has been indebted to the IMF for many years and was suffering from multiple bouts of hyperinflation since 2001.  Milei ran on a Libertarian platform and his campaign promise was to eliminate government waste.  He went on to reduce spending by 30% and cut monthly inflation from 25% down to 2.7%.

By all accounts, Milei’s administration has been a resounding success in terms of economic reform and he has proven that Austrian economics work in practice and not just in theory.  His open disdain for the political left was refreshing to see in a political candidate – Much like Trump, he has not been afraid to say what he really thinks of progressives.

After a decade of woke authoritarianism (much of it funded with American tax dollars) it’s hard to argue with anything he says here.  Milei’s disdain for the political left is only matched by his disdain for big government.  His favorite campaign prop was a chainsaw, representing his intent to chop the fat off the bureaucracy.  

Elon Musk’s DOGE group under the direction of President Trump is seeking to top Javier Milei’s cost cutting accomplishments with the rapid exposure of wasteful government agencies like USAID.  To celebrate Musk’s efforts, Milei arrived at the Conservative Political Action Conference (CPAC) in Washington DC with a gift for Musk – A giant chrome “chainsaw for bureaucracy”.

🔥LEGENDARY! President of Argentina Javier Milei just linked up with Elon Musk and gifted him a DOGE chainsaw.

Absolute beast mode.
pic.twitter.com/oOFZe3dEEN

— Benny Johnson (@bennyjohnson) February 20, 2025

The saw blade is engraved with Milei’s catchphrase, “Viva la libertad carajo!,” which roughly translates to “Long live freedom, Goddammit!”  Musk wielded the chainsaw on stage at CPAC, swinging it wildly.  Thankfully the machine appeared to be inert, otherwise Musk probably would have cranked it into action and run around the stage with it.  

🚨 LMAO! Elon Musk just paraded around the stage at CPAC with a chainsaw given to him by Javier Milei 🤣

“THIS IS THE CHAINSAW FOR BUREAUCRACY!” 🔥 pic.twitter.com/NcL2f22xjO

— Nick Sortor (@nicksortor) February 20, 2025

Democrat Senator Chuck Schumer recently stated that though cuts to government might be necessary, Musk was taking a “meat axe” to the system and chopping everything.  Chuck is right, a meat axe is not the proper tool, a chainsaw is much better.

Authored by Kimberly Hayek via The Epoch Times (emphasis ours),

Delta Air Lines is offering US$30,000 to each of the 76 passengers aboard the plane that flipped upside down while landing at the Toronto Pearson International Airport on Feb. 17.

Those hurt in the crash sustained non-critical injuries, according to the airport’s chief executive.

A Delta spokesperson said the payment offer is a good-faith gesture with no strings attached, according to a statement sent to media outlets on Feb. 19. They will be offered to all passengers, not just the injured.

There were 76 passengers and four crew members aboard Flight 4819 when it crashed during landing and overturned at a snowy Toronto-Pearson International Airport just after 2 p.m. EST on Feb. 17.

Communications between the tower and pilot were normal on approach, and the cause of the crash is still under investigation. The airport’s fire chief has said that the runway “was dry and there was no crosswind conditions.”

The flight originated from Minneapolis. There were no fatalities, though 21 people were injured. As of the morning of Feb. 19, one person remained in the hospital, according to an update by the airline.

The crash left passengers, who were buckled into their seats, dangling upside down, before being helped by the crew to get off the plane.

If all passengers aboard the jet, a Mitsubishi CRJ-900LR, take the offer, the total payout amounts to more than $2.2 million. Some passengers have already retained legal representation to pursue further action.

The airport authority has credited the actions of the flight crew and first responders in saving the passengers.

“The crew of Delta flight 4819 heroically led passengers to safety evacuating a jet that had overturned on the runway, on landing amidst smoke and fire,” Greater Toronto Airports Authority CEO Deborah Flint said on Feb. 18.

The plane’s cockpit voice recorder and flight data recorder have been recovered and sent to a lab for further analysis, according to the Transportation Safety Board of Canada, which is leading the investigation into the incident.

“Following this initial impact, parts of the aircraft separated and a fire ensued,” Transportation Safety Board of Canada senior investigator Ken Webster said in a Feb. 18 update. “The fuselage came to rest slightly off the right side of the runway, upside down, facing the other direction.”

The agency has said it’s still unclear what led to the crash.

“At this point, it’s far too early to say what the cause of this accident might be,” Webster said.

The U.S. Federal Aviation Administration, U.S. National Transportation Safety Board, Delta’s incident response team, and Mitsubishi, the maker of the CRJ900 aircraft (originally made by Bombardier), are also taking part in the investigation.

As of Feb. 19, two of the airport’s five runways remained closed. Crew began removing parts of the wreckage on Feb. 19. The airport authority says once the wreckage is removed, it is expected that delays will persist as authorities inspect the runway to ensure everything is in proper condition.

Jennifer Cowan and The Canadian Press contributed to this report. 

*  *  *

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Authored by Steve Watson via Modernity.news,

The White House Deputy Chief of Staff Stephen Miller torched fake news reporters Thursday during a briefing for playing along with the charade for years that Joe Biden was mentally fit, before giving them a lecture about how government works.

“Many of the people in this room for four years failed to cover the fact that Joe Biden was mentally incompetent and was not running the country,” Miller told leftist media correspondents.

He then noted that to counter the ridiculous leftist talking point that Elon Musk is an unelected bureaucrat, the media was in need of “a brief civics lesson.”

Miller then began his short but ever so sweet fact smackdown.

“A president is elected by the whole American people. He is the only official in the entire government that is elected by the entire nation. Judges are appointed, members are Congress are elected at the district or state level,” he noted.

“The Constitution, Article II, has a clause known as ‘the vesting clause,’ and it says ‘the executive power shall be vested in ‘a’ president — singular. The whole will of democracy is imbued into the elected president. That president then appoints staff to impose that democratic will onto the government,” he continued.

“The threat to democracy — the existential threat to democracy — is the unelected bureaucracy of lifetime, tenured civil servants who believe they answer to no one; who believe they can do whatever they want without consequence; who believe they can set their own agenda, no matter what Americans vote for,” Miller explained.

“So, Americans vote for radical FBI reform, and FBI agents say they don’t want to change. Or Americans vote for radical reform on our energy policies, and EPA bureaucrats say that they don’t want to change. Or Americans vote to end racist DEI policies, and lawyers at the DOJ say they son’t want to change,” Miller further outlined.

“What President Trump is doing is he is removing federal bureaucrats who are defying democracy by failing to implement his lawful orders, which are the will of the whole American people,” Miller asserted.

Watch:

JUST IN: Stephen Miller slams the media to their faces for lying about Joe Biden’s mental decline for years before calling out federal bureaucrats.

“Many of the people in this room for four years failed to cover the fact that Joe Biden was mentally incompetent and was not… pic.twitter.com/t4Aj6BZvob

— Collin Rugg (@CollinRugg) February 20, 2025

Is there an angle of this where we can see their faces?!

Legacy media doesn’t know what to do. They’ve been coddled too long by DEI KJP.

— Paul A. Szypula 🇺🇸 (@Bubblebathgirl) February 20, 2025

So, incredibly well put.

The voice of reason has returned to the White House.

— Christopher Kawasaki (@Ckawasaki) February 20, 2025

This clip should be rquired viewing for everyone!

— BloodyPete🇺🇸 (@AirForce__Vet) February 20, 2025

If you cannot faithfully implement the policies of the duly elected Executive, you shouldn’t be employed in the Executive Branch.

This should be common sense.

— often uncommon 🏴‍☠️ (@oftenuncommon) February 20, 2025

As we’ve previously highlighted, it seems shocking to the leftist media that Trump, given a mandate by the American people, would put into place people who are loyal to him and will implement his policies.

They, laughably, think this is somehow corrupt or something.

And heavens forbid that the people he puts in place might be competent at what they are there to do!

*  *  *

Your support is crucial in helping us defeat mass censorship. Please consider donating via Locals or check out our unique merch. Follow us on X @ModernityNews.

In the latest reversal of the cantankerous policies of former United States Securities and Exchange Commission Chair Gary Gensler – who officials in the crypto industry complained had sought to regulate the industry to death through enforcement actions – the SEC has agreed to dismiss the lawsuit against centralized exchange firm Coinbase, accusing the company of operating as an unregistered securities broker.

According to an announcement from Coinbase, the lawsuit dismissal is still subject to approval by an SEC commissioner before it is officially withdrawn.

Dismissing the Coinbase lawsuit still requires a commission vote. The company expects that to happen next week, Paul Grewal, Coinbase’s chief legal officer said.

Now the US can finally get back to doing what it does best: building innovative tech that improves the world. https://t.co/jl43dIxBAj 4/4

— paulgrewal.eth (@iampaulgrewal) February 21, 2025

Coinbase CEO Brian Armstrong said:

“If this goes through, it’s a really big deal, not just for us, but for the whole crypto industry. The 50 million Americans who hold crypto, and I think for the rest of the world because this is an important signal about where things are going.”

🚨BREAKING: @brian_armstrong announces that the 🇺🇸SEC agrees to dismiss their litigation against @coinbase pic.twitter.com/cy792E6Bkl

— CryptosRus (@CryptosR_Us) February 21, 2025

The SEC sued Coinbase in June 2023 amid a torrent of litigation against the crypto industry, attempting to frame many firms and projects as either unregistered securities brokers or securities in and of themselves — placing heavy regulatory and financial pressure on the industry.

The Wall Street Journal reports that Acting SEC Chairman Mark Uyeda said Thursday that the unit would have a broader remit and “deploy enforcement resources judiciously,” including investigating fraud involving crypto assets. The Coinbase lawsuit didn’t involve any fraud claims.

Uyeda said last month that a new SEC task force is considering how to move away from Gensler’s approach toward the crypto market.

COIN share price is up around 5% in the pre-market…

Last week, the SEC filed a request to put a similar case against Binance on hold, citing the pending development of a regulatory framework for digital assets under President Donald Trump’s crypto-friendly administration.

“It’s a great day for Coinbase and for crypto,” said Grewal.

“We were committed to defending it [the lawsuit] to the gates of hell, for as long as it took and for as much money as it took.”

Bitcoin prices jumped back above $99,000 on the headlines but are giving some of that back…

The SEC complaint will be dismissed with prejudice, which means the agency can’t refile it, Coinbase said in a statement. 

Paul Atkins, the pro-crypto advocate nominated by Trump to head the SEC, hasn’t been confirmed yet.

Goldman Sachs crypto team has noted a sentiment shift across the crypto-market following the US presidential elections, as the new administration signaled its support for the industry. 

Here is a summary of the key headlines:

• Cryptocurrency working group: Trump ordered the creation of a cryptocurrency working group tasked with proposing new digital assets regulation and exploring the creation of a national cryptocurrency stockpile. It will also look to promote the ability of the public to use public blockchains and promote the US dollar through the support for dollar-backed stablecoins globally. The working group will be chaired by the White House AI & Crypto “czar” David Sacks, and include the Secretary of the Treasury, Attorney General, Secretary of Commerce, Chairs of the SEC & CFTC, and heads of other relevant agencies and departments. As next step, the working group is expected to publish recommendations. Its first priority will be working with Congress on stablecoin legislation, as indicated recently by Sacks.

• National strategic reserve: We are yet to see any commitment towards a strategic national reserve that would have exposure to cryptocurrencies. In the meantime, a number of US states (eight) are at various stages as proposing legislation for crypto reserves, and Trump has ordered the establishment of a sovereign wealth fund, although this is seen as separate from the idea of a strategic reserve.

• New leadership appointments across agencies: Paul Atkins, known to be supportive for innovation in capital markets, was named the nominee for Chairman of the SEC. Mark Uyeda was appointed as the acting Chairman of the SEC and has set up the new SEC Crypto task force. Caroline Pham was picked as the Acting CFTC Chair, and has since ordered the launch of public roundtables on evolving trends in market structure, including issues such as affiliated entities and conflicts of interest, prediction markets, and digital assets. Subsequently, Brian Quintez (currently the head of policy at a16zcrypto) was nominated to chair the CFTC. Jonathan Gould, a one-time Chief Legal Officer of Bitfury, was nominated to run the Office of the Comptroller of the Currency. Wyoming Senator Cynthia Lummis  was named as the chair of the Senate Banking Subcommittee on Digital Assets. Lummis has been historically vocal on the digital asset industry and has since the appointment introduced bipartisan stablecoin legislation.

• SEC crypto task force: The new SEC leadership announced the creation of a new task force (Crypto 2.0) that will be dedicated to helping the SEC draw clear regulatory lines, provide realistic paths to registration, craft sensible disclosure frameworks, and deploy enforcement resources judiciously. Spearheaded by the SEC Commissioner Hester Pierce, who has been a long-time advocate for bringing more regulatory clarity to the space, the task force announced key high-level areas that it will be targeting, including the possible update to the special purpose broker dealer position and providing more clarity for crypto ETF issuers and the application process.

• SAB 121 revoked: The SEC has issued SAB 122 that rescinds the interpretative guidance SAB 121. SAB 121 was issued in 2022 and forced public companies to account for custodied digital assets on balance sheet (and thus was highly punitive to banks due to our capital treatment of on balance sheet assets). The revocation is the first step in allowing banks to custody and engage directly with digital assets, subject to additional regulatory guidance to come from other banking and markets regulators.

• Banks and crypto: Fed Chair Powell confirmed that banks can serve crypto clients as long as they can manage the risk, although banks continue to ask for additional clarity from the Fed.

While the new US administration has sent a strong signal on its commitment towards reshaping the digital asset industry, these announcements have yet to materialize into the necessary policy implementation.

US equity futures are flat, as European and Asian markets rise, as sentiment improves on the last day of the week. As of 8:10am ET, S&P futures were unchanged at 6,138 after Walmart’s forecast and concerns about consumer behavior led to a decline in stocks Thursday; Nasdaq futures gained 0.3% with the Mag 7 names are mostly higher led by META +0.6%. US-listed Chinese stocks rose in premarket trading on Alibaba’s post-earnings euphoria and after Treasury Secretary Scott Bessent said he would hold an introductory phone call with his Chinese counterpart, though he didn’t specify who on the Chinese side he’d speak to. Bond yields are 1-2bps lower and the USD is higher. Commodities are mixed: oil fell -0.8% this morning, while base metals are higher. From the macro perspective, overnight headlines were largely quiet; earnings results since market-close were mixed; BKNG announced 10% dividend increase and additional buybacks. Today, key macro focus will be global PMIs: the Mfg PMI is expected to print 51.4 vs. 51.2 prior; the Services PMI should print 53.0 vs. 52.9 prior.

In premarket trading, the Mag7 was little changed (GOOGL +0.2%, AMZN +0.2%, AAPL -0.07%, MSFT +0.3%, META +0.6%, NVDA +0.06% and TSLA -0.3%). US-listed Chinese stocks rise after Alibaba’s earnings offered a fresh boost to the China tech sector.Baidu (BIDU) +3%, JD.com (JD) +1.6%). Data center providers gained as Alibaba pledged to increase capital spending to support its AI ambitions. Dow Jones heavyweight UnitedHealth plunged more than 10%  after the WSJ reported that the DOJ has launched an investigation into the company’s Medicare billing practices in recent months. The report cited people familiar with the matter. The Financial Times reported a high-level Japanese group had drawn up plans for Tesla to invest in carmaker Nissan. Here are some more premarket movers:

• Akamai Technologies (AKAM) drops 9% after the infrastructure software company gave an outlook that is weaker than expected.
• Block (XYZ) falls 8% after the digital payments company gave a 2025 gross profit outlook slightly below what Wall Street expected, with Mizuho noting “no new upside.”
• Celsius Holdings (CELH) jumps 31% after the company said it would buy rival Alani Nutrition for $1.8 billion in cash and stock, including $150 million in tax assets.
• Dropbox (DBX) drops 9% after the document management software company reported fourth-quarter results. Analysts noted concerns over user trends and growth.
• Five9 (FIVN) rises 15% after the software company’s earnings beat estimates thanks to strong growth in subscription revenue.
• Floor & Decor Holdings Inc. (FND) climbs 9% after the retailer posted 4Q profit that beat estimates and same-store sales were better than expected.
• Grid Dynamics Holdings (GDYN) soars 22% after the information technology services company provided revenue forecasts for the 1Q and year that topped expectations.
• Innodata (INOD) jumps 11% after the data engineering company reported fourth-quarter revenue and earnings per share that beat the average analyst estimate.
• MercadoLibre (MELI) climbs 12% as Latin America’s most valuable company far surpassed net income estimates in the final quarter of 2024 while growing revenue at its commerce and fintech units at a faster pace than expected.
• Nubank (NU) falls 8% after the digital bank reported fourth-quarter net income that missed consensus estimates.
• RingCentral (RNG) declines 3% after the communications software company gave an outlook that is weaker than expected for EPS and revenues.
• Rivian (RIVN) slips 3% after the electric-vehicle maker issued a downbeat first-quarter vehicle delivery forecast that overshadowed its first-ever quarterly gross profit.
• Weave Communications (WEAV) slumps 15% after the infrastructure software company reported its fourth-quarter results and gave a forecast that is seen as conservative.

US equities have been lagging their European and Asian counterparts so far this year, and BofA CIO Michael Hartnett reiterated a preference for global stocks to US peers, seeing markets such as Germany, China, Japan and South Korea as more attractive at a time when business activity is improving. US companies’ profit outlooks for 2025 have also been relatively subdued, strategists at JPMorgan noted.

It is a quiet end to a turbulent week but we still have a huge, $2.7 trillion opex to go through. Goldman estimates that over $2.7 Trillion of notional options exposure will expire including $1.2 Trillion of SPX options and $615 Billion notional of single stock options, 9:30 AM Settlement: $1.3 Trillion ($1.2 Trillion is SPX AM), and $1.4 Trillion ($615 Billion single stocks). 

Dealers are long +$9.787 Billion of S&P 500 gamma at current spot, acting as a market buffer, supporting weakness and muting rallies. The Goldman index trading team estimates that 50% of this long gamma position rolls off tomorrow, and the market will have the ability to move more freely next week (read our full preview here).

Traders are now looking ahead to Germany’s weekend election and hoping the results will allow the Conservative front-runner to forge a coalition that can push through economic reforms and loosen borrowing rules. If Europe’s biggest economy can spend more on defense, it may help calm a market rattled by Washington’s efforts to boost ties with Russia, they said.

In Europe, the Stoxx 600 Index added 0.6%, heading for its ninth consecutive weekly gain on the back of resilient profits and optimism over peace talks in Ukraine; chemical names as Air Liquide shares surged with analysts enthusiastic about their higher margin guidance. Standard Chartered leads outperformance in banks after confirming plans to hand back $1.5 billion more to shareholders. The German DAX index rises 0.2% ahead of Sunday’s election. European stocks enjoyed about $4 billion in inflows in the week through Feb. 19, the most since February 2022, according to a Bank of America Corp. note that cited EPFR Global data. Here are some of the biggest movers on Friday:

• StanChart shares jump as much as 5.8% to hit a new 2014-high Friday after the bank’s fourth-quarter results, posting the best performance in the European banking sub-index.
• Kingspan shares gain as much as 12%, the most since July 2023, after the building materials company beat revenue and Ebitda estimates in its full-year results.
• UK retailers and grocery stocks are outperforming on Friday after sales grew more strongly than expected at the start of the year, as robust demand for food offsets weaker consumer confidence (JD Sports (+2.4%), Pets at Home (+1.5%), Frasers Group (+1,1%), Dunelm (+0.6%), B&M (+1.2%) and Currys (+1.2%); Primark-owner AB Foods, which is not in the sub-index, is up 1.5%)
• Ferrexpo shares rebound as much as 12% after saying it hasn’t been formally been notified by Ukraine about a possible seizure of a stake in its iron ore mine.
• Air Liquide shares rise as much as 3.8%, heading for a record close, with analysts enthusiastic about the French chemicals company’s higher margin guidance after full-year results were described as in line.
• Sika climbs as much as 4.1%, the most since September, after the Swiss construction and materials company reported full-year results that met market expectations and is set for continuing growth this year, according to Baader.
• ProSieben shares rise as much as 12% in Frankfurt after La Stampa said MFE-MediaForEurope — the broadcaster owned by Italy’s Berlusconi family — may consider making a takeover bid.
• Alten shares jump as much as 16%, their biggest one-day gain in nearly 17 years, after the French IT services firm released results and said that its business is stabilizing, even as there is no sign yet of a recovery.
• Diageo shares rise as much as 2.1%, extending a rebound into a second session, with analysts bullish on recovery prospects after management gave a presentation at the Consumer Analyst Group of New York (CAGNY).
• Elekta shares tumble as much as 11%, the most in more than 8 months, after the Swedish medical technology firm reported sales and earnings for the third quarter that missed estimates, while cutting its FY guidance for sales growth and Ebit margin.

Earlier in the session, stocks in Asia rose, buoyed by a rally in technology shares as Chinese e-commerce giant Alibaba’s stellar results boosted investor sentiment. The MSCI Asia Pacific Index climbed 0.7%, supported by Alibaba along with Tencent, TSMC and Xiaomi. The regional gauge marked a sixth-straight weekly advance, rising 1.2% for the period, the longest winning streak in almost a year. Equities in Hong Kong and mainland China led gains around the region Friday. Alibaba shares jumped the most in nearly three years after it reported sales that beat estimates. The results were seen as a good sign for a continuation of the DeepSeek-driven rally in everything related to China’s AI sector, which helped push the Hang Seng Tech Index into a bull market earlier this month. Chinese technology stocks surged to their highest level since 2022, lifted by a 14% jump in Alibaba. Elsewhere in the region, Japanese stocks closed 0.3% higher after Bank of Japan Governor Kazuo Ueda said he expects easy financial conditions to support the economy. Shares saw notable gains in Taiwan and the Philippines.

In rates, treasury futures drifted higher with the curve flatter, supported by a drop in oil and wider gains seen across bunds which jumped on a notably weak French service PMI print for February although gains were tempered by more encouraging readings from Germany. German 10-year yields fall 4 bps to 2.49%. Gilts were largely unmoved by a UK PMI which came in close to expectations. UK 10-year borrowing costs are flat at 4.61%. Treasuries edge higher.

In FX, the Bloomberg Dollar Spot Index rose 0.2%, rebounding from 2025 lows with economists expecting the composite reading at 53.2, slightly below the January reading; the yen weakened 0.5% against the US dollar after BOJ Governor Ueda signaled a readiness to quell a surge in bond yields. The Japanese currency earlier touched a fresh 2025 high after inflation accelerated more than forecast. The euro falls 0.3% after purchasing manager data showed business activity in the region hardly grew in February, reinforcing fears that the bloc remains mired in stagnation.

In commodities, oil prices decline, with WTI falling 1% to $71.80 a barrel. Spot gold drops $8 to around $2,931/oz, but still headed for an eighth consecutive weekly advance as the geopolitical and trade tensions fueled demand for the precious metal.

The US economic data calendar includes February manufacturing PMI (9:45am), University of Michigan sentiment and January existing home sales (10am). Fed speaker slate includes Jefferson at 11:30am on central bank communication

Market Snapshot

• S&P 500 futures little changed at 6,136.25
• STOXX Europe 600 up 0.3% to 552.66
• MXAP up 0.8% to 190.21
• MXAPJ up 1.3% to 601.61
• Nikkei up 0.3% to 38,776.94
• Topix little changed at 2,736.53
• Hang Seng Index up 4.0% to 23,477.92
• Shanghai Composite up 0.8% to 3,379.11
• Sensex down 0.5% to 75,328.71
• Australia S&P/ASX 200 down 0.3% to 8,296.21
• Kospi little changed at 2,654.58
• German 10Y yield little changed at 2.50%
• Euro down 0.2% to $1.0475
• Brent Futures down 0.6% to $76.00/bbl
• Gold spot down 0.4% to $2,927.26
• US Dollar Index up 0.23% to 106.62

Top Overnight News

• Russia used the first round of talks with the US over ending the war in Ukraine to demand the withdrawal of Nato forces from the alliance’s eastern flank, triggering concern in Europe that the Trump administration could acquiesce to seal a peace deal. FT
• Wall Street is strategizing for more radical moves from Donald Trump amid talk he may force some of the US’s foreign creditors to swap their Treasuries into ultra long-term bonds to ease America’s debt burden. BBG
• The US and EU have discussed a potential deal to cut and ultimately scrap tariffs on car imports.   EU officials insisted there was “positive momentum: towards a compromise between the two sides following talks in Washington this week. FT
• China Foreign Ministry says Vice Premier He Lifeng will speak with US Treasury Secretary Bessent, “will communicate important issues in the economic field between China and US over video call”.
• Nissan shares jumped on an FT report that a high-level Japanese group may seek investment from Tesla to aid the carmaker. The proposal envisions a consortium of investors, with the EV maker as the largest backer, acquiring Nissan’s plants in the US. FT
• Fed’s Kugler (voter) said she believes the Fed should hold the policy rate in place for some time and noted there is currently a lot of uncertainty about the potential effect of President Trump’s tariffs, as well as noted they are looking at potential scenarios on tariff impacts and tariffs could put up price pressures, but the extent is less known: BBG
• Senate continues vote-a-rama through the night to develop budget framework for Trump agenda: Fox’s Pergram.
• Senate GOP budget resolution passes with Rand Paul voting no: Punchbowl
• Japan’s national CPI for Dec was mostly inline, including on headline (+4% vs. the Street +4% and vs. +3.6% in Dec) and core (+2.5% vs. the Street +2.5% and vs. +2.4% in Dec). BBG
• BOJ Governor Kazuo Ueda issued a mild warning on Friday that it could increase bond buying if “abnormal” market moves trigger a sharp rise in yields, but he was reiterating the bank’s pledge made when it began tapering bond purchases in July last year. RTRS
•  
• The PBOC added a net $11.6 billion into the financial system, it’s largest single-day infusion this month, to try to ease a cash crunch. BBG
• UK retail sales come in solidly ahead of expectations at +2.1% M/M (vs. the Street +0.9%). RTRS… Eurozone flash PMIs are mixed for Feb, with manufacturing ticking up to 47.3 (vs. 46.6 in Jan and slightly above the Street’s 47 forecast) while services fell to 50.7 (down from 51.3 in Jan and below the Street’s 51.5 consensus), and underlying inflation trends worsened (input and output costs both jumped in Feb). S&P
• European stocks attracted the most inflows since war broke out Ukraine three years ago, according to BofA, citing EPFR Global data. About $4 billion flowed into European funds, underpinned by optimism on peace negotiations. BBG

A more detailed look at overnight markets courtesy of Newsquawk

APAC stocks traded mostly higher albeit with mixed price action seen following the subdued handover from Wall St where stocks declined amid geopolitical uncertainty, disappointing data and weak Walmart guidance, while participants in the region digested earnings releases and central bank commentary. ASX 200 marginally declined amid a deluge of earnings releases and after Australia’s flash manufacturing PMI improved but remained in contraction territory, while RBA Governor Bullock reiterated a cautious approach to further rate cuts. Nikkei 225 swung between gains and losses with initial pressure owing to recent currency strength and after mostly firmer-than-expected CPI data, although the index then rebounded and the yen weakened amid comments from BoJ Governor Ueda who said if markets make abnormal moves, they stand ready to respond nimbly, such as through market operations. Hang Seng and Shanghai Comp are positive with notable outperformance in the Hong Kong benchmark which was led by a tech surge as Alibaba shares climbed by a double-digit percentage post-earnings, while the PBoC and Chinese Premier Li recently pledged efforts to smooth financing and stimulate consumption, respectively.

Top Asian News

• BoJ Governor Ueda said BoJ’s massive monetary easing including YCC was a necessary process towards achieving the price target and they acknowledged the BoJ’s massive stimulus caused various side effects, Ueda said they expect long-term interest rates to fluctuate to some extent depending on the market’s view on the economic outlook and if markets make abnormal moves, they stand ready to respond nimbly, such as through market operations, to smooth market moves. Ueda said he won’t comment on where long-term interest rates could eventually converge and cannot say specifically when exactly the BoJ could conduct emergency market operations to soothe yield moves. Furthermore, he said there could be more side effects from monetary easing and that more interest rate hikes could come into sight if the price outlook continues to improve, and there might be some unpredictable impact on the economy, while he reiterated the accommodative environment continues and BoJ will adjust monetary policy if underlying prices rise.
• RBA Governor Bullock said the board is committed to being guided by incoming data and evolving risk assessments, while she added there is no pre-commitment to any specific course of action on interest rates and the board remains cautious about further policy easing.

European bourses (STOXX 600 +0.3%) opened with a modest positive bias, but sentiment slipped a touch, to display a more mixed picture. Thereafter, sentiment in Europe was hit following the release of the French PMI metrics, but the downside largely stabilised after the German and EZ figures. European sectors hold a positive bias, but with the breadth of the market fairly narrow aside from the day’s leader. Chemicals tops the pile, lifted by post-earning strength in Air Liquide (+2.9%). Energy resides at the foot of the pile, given the weakness in oil prices in today’s session.

Top European News

• UK reportedly lines up a new ambassador to help rebuild China ties, according to Reuters.

FX

• DXY is attempting to recoup some lost ground after printing a YTD trough overnight at 106.35. Downside in the prior session stems from the opening up the prospect of a US-China trade deal, softer-than-expected US data and the US curve flattening on the back of Treasury Secretary Bessent’s recent comments. If upside for the DXY extends, the next target comes via the 107 mark with yesterday’s peak just above at 107.15.
• EUR was knocked lower in early trade following a dismal outturn for French flash PMI data which saw the services metric print below the lower end of expectations, dragging the composite metrics further into negative territory and to its lowest reading since 2023. EUR/USD printed a session low at 1.0469 before recouping some ground after a beat on German manufacturing PMI was able to move the composite metric further into expansionary territory. Attention now turns to Sunday’s German election with focus on what the outcome will mean for the nation’s fiscal agenda. ECB’s Lane due to speak at 14:30GMT.
• JPY is the clear laggard across the majors with a firmer-than-expected outturn for Japanese national CPI overshadowed by comments from BoJ Governor Ueda. Ueda declared that the Bank will respond to any abnormal upside in long-term interest rates with purchases of government bonds. As such, after initially printing a fresh YTD trough overnight at 149.29, the pair has returned to a 150 handle.
• Cable printed a fresh YTD peak in early European trade following a solid retail sales report for January with the headline print coming in above the top end of estimates. On the data slate, flash PMIs for January were a mixed bag with a beat on services offset by a miss in manufacturing, leaving the composite in-line with estimates at 50.5.
• Antipodeans are both marginally softer vs. the stronger USD. AUD/USD was able to print another fresh YTD peak and breach the 0.64 threshold (0.6408 peak) before succumbing to the strength in the greenback.

Fixed Income

• USTs are marginally firmer but only posting gains of a handful of ticks in rangebound/choppy trade with US-specifics so far somewhat lighter than has been the case in recent sessions. Overnight, USTs caught a bid alongside the discussed move in JGBs. Specifically, at the upper-end of a 109-03+ to 109-11+ band, eyeing the 109-15 peak from Monday. Ahead, while we await updates to the tariff and geopolitical narratives we get data via US Flash PMIs and then an appearance from Fed’s Jefferson (Voter) on Fed Communication, from this we expect both a text release and a Q&A.
• Bunds are firmer, leading the EGB space. At the upper-end of a 131.56 to 132.20 band which has eclipsed Tuesday’s best but yet to approach Monday’s 132.58 WTD peak. Into the morning’s data Bunds were around 15 ticks off the above base and in the red. The French numbers hit first and came in softer than expected with the Composite at its lowest since 2023 and particular concern around the Services figures. A release which lifted Bunds to the session high, but soon faded into the German figures which were mixed but far better than the French metrics earlier. The pan-EZ figure came in mixed vs consensus and spurred no real reaction.
• Gilts are moving with the above but with magnitudes more contained into its own data. A release which didn’t really spark much of a reaction given it was quite mixed. Services came in marginally better than expected while Manufacturing missed and printed outside the forecast range leaving Composite in-line with consensus and only incrementally down from the prior. Prior to the Flash PMIs, UK Retail metrics came in stronger than expected though the PNSB figures, while at a record surplus, actually posted a smaller surplus than the OBR forecast at the time of the October Budget; a ‘surplus’ which, given the OBR compare, isn’t as much of a welcome indicator for the Chancellor as it may appear on face value.
• JGBs were supported overnight by BoJ Governor Ueda, remarks which more than offset any pressure from hotter-than-expected Japanese CPI. Ueda said that the BoJ stands ready to respond nimbly such as through market operations if markets make abnormal moves.
• Orders for the 8yr BTP Plus have hit EUR 14bln across the offer period

Commodities

• Subdued price action across the crude complex, with prices weakening as the European session went underway and the dollar trending higher. Sentiment for the complex could also be subdued by the downbeat commentary from the EZ flash PMIs, which suggested “Economic output in the eurozone is barely moving at all.” Brent sits in a USD 75.89-76.75/bbl.
• Lower trade across precious metals as the Dollar attempts a recovery from its recent tumble and in turn prompting downside across metals. It was also reported that record gold prices have dampened demand at top Asian hubs, with buyers in India and China reportedly “sitting back” and waiting for a drop in prices. Spot gold resides in a USD 2,916.82-2,949.93/oz range.
• Base metals are lower across the board amid the aforementioned recovery in the Dollar coupled with flimsy risk sentiment, albeit in the absence of macro newsflow. 3M LME copper trades with mild losses between a USD 9,455.95-9,570.80/t range.
• EU’s Energy Commissioner said the EU is looking for more gas, including from the likes of the US, to replace Russian supplies, via Reuters; the draft shows that the EU is aiming for long-term LNG contracts to stabilise prices. The EU is also looking for renewable energy to cut its overall reliance on fuel.
• Oil flows from Tengiz field via Caspian Pipeline Consortium are uninterrupted, according to Ifax citing Tengizchevroil.

Geopolitics: Middle East

• Israeli police received reports of two explosions in Bat Yam and one in Holon on Thursday night, while four explosive devices were found in buses in Bat Yam and Holon. Israeli PM’s office said there was an attempt to carry out a series of attacks on buses and Israeli PM Netanyahu has instructed the military to carry out an intense operation in the West Bank against “terror” hubs.
• Israel military said two bodies released by Hamas on Thursday were identified as Israeli hostages Kfir and Ariel Bibas, while it demanded for Hamas to return Shiri Bilbas along with all hostages. It was separately reported that the IDF said the exchange with Hamas on Saturday will continue as planned, according to Asharq News.

Geopolitics: Ukraine

• “AFP quoting Ukrainian source: Kiev and Washington continue negotiations on strategic minerals”, according to Sky News Arabia.
• Russia Security Council says threats to Russian port infrastructure from NATO have intensified, according to RIA. Adds, NATO considers maritime transport and major oil terminals as targets for attacks.
• US Secretary of State Rubio said the meeting between US President Trump and Russian President Putin will largely depend on whether progress can be made on ending the war in Ukraine.
• US opposes language on ‘Russian aggression’ in G7 statement on Ukraine, according to FT
• Polish PM Tusk called for financing aid for Ukraine from frozen Russian assets and urged stronger defences along EU borders with Russia.
• China’s Foreign Minister Wang Yi said China supports all efforts conducive to peace in Ukraine including the recent consensus reached by the US and Russia, while he added that China is willing to continue playing a constructive role in political resolution of the crisis.
• “German Chancellor: Ceasefire in Ukraine is still elusive”, according to Sky News Arabia.
• Russian Kremlin says there is an understanding for a Trump-Putin meeting; no concrete details yet. Special military operation is continuing and goals will be achieved. Have goals related to security and ready to achieve this via negotiations.

Geopolitics: Other

• China’s military warned and drove away three Philippine aircraft that ‘illegally intruded’ into the airspace near the Spratly Islands and reefs on Thursday.
• There has been a new cable break in the Baltic Sea, according to information to TV4 News, The Armed Forces confirm that they are aware of the information.
• Sweden’s PM says they are looking into a breach of an undersea cable within the Baltic Sea; Coast Guard adds that the suspected breach occurred in Sweden’s EEZ.
• European Commission is to propose a new surveillance mechanism for submarine cables, according to a document cited by Reuters.

US Event Calendar

• 09:45: Feb. S&P Global US Manufacturing PM, est. 51.4, prior 51.2
  • Feb. S&P Global US Services PMI, est. 53.0, prior 52.9
  • Feb. S&P Global US Composite PMI, est. 53.2, prior 52.7
• 10:00: Feb. U. of Mich. Sentiment, est. 67.8, prior 67.8
  • Feb. U. of Mich. Current Conditions, est. 68.5, prior 68.7
  • Feb. U. of Mich. Expectations, est. 67.4, prior 67.3
  • Feb. U. of Mich. 1 Yr Inflation, est. 4.3%, prior 4.3%
  • Feb. U. of Mich. 5-10 Yr Inflation, est. 3.3%, prior 3.3%
• 10:00: Jan. Existing Home Sales MoM, est. -2.6%, prior 2.2%

Central Bank Speakers

• 11:30: Fed’s Jefferson Speaks on Central Bank Communication

DB’s Jim Reid concludes the overnight wrap

Five years ago today we all went home on the Friday night blissfully unaware of the way our lives would change by Monday, and then subsequently over the next couple of years. This weekend coming was when Covid cases started to rise exponentially in Italy and by Sunday night 11 Italian towns were in lockdown. The rest as they say is history. I’ll do a CoTD today on global asset price performance since this point. So watch out for that. I wonder if in five years time we’ll look back on this coming weekend as a pivotal moment in Europe (good or bad) given the German election.

We’ll have a full preview of that below but a brief review of the last 24 hours first. We saw a moderate risk-off move yesterday, with the S&P 500 (-0.43%) falling back from its all-time high, whilst gold prices closed at a record $2,939/oz. This morning Chinese risk is doing well on the back of Alibaba’a earnings. The main story in the US was a weaker-than-expected forecast from Walmart, which added to nerves about the health of the consumer right now, especially after a soft retail sales print last week. So that dented confidence, but some nervousness is also setting in ahead of a pivotal German election this Sunday, which could have significant implications for European markets and geopolitics for years to come.

The election comes against a difficult backdrop for Germany right now, as their economy has just experienced two consecutive annual contractions over 2023 and 2024. Indeed its economy hasn’t grown over the last 5 years which for one of the strongest nations in the world, is a major disappointment and big cause for concern.

Moreover, the vote itself is taking place several months earlier than planned, as it was called after the three-way coalition of the SPD, Greens and FDP collapsed late last year. There’s a big debate about what Germany needs to do to boost growth, and a large part of that has centred around whether the new government should pursue a more expansionary fiscal policy, and even reform the constitutional debt brake to allow for more spending.

As it stands, Politico’s polling average has the conservative CDU/CSU bloc in the lead on 30%, who are currently led by Friedrich Merz. They’re followed by the far-right AfD on 21%, Chancellor Scholz’s centre-left SPD on 16%, and the Greens on 13%. Then you’ve got several parties on the cusp of the 5% threshold to enter Parliament, including the Left who’ve seen a late surge up to 7%, with the far-left BSW and the free-market FDP both on 5% (other polling aggregates suggest a rounding down to slightly below 5% for BSW and FDP). It’s important to keep an eye on those parties around the 5% threshold, as small changes in vote share could have a big impact on coalition formation and how fragmented the new Bundestag will be. So here the outcomes become non-linear between 4.9% of the vote and 5.1%. Put simply if one of the fringe parties enters parliament it‘s likely that the centrist parties will still have a two-thirds majority that could allow them to change the debt break if they agree to. If two enter they are unlikely to have a two-thirds majority and the subsequent horse trading could prevent meaningful reform. See my CoTD from Wednesday here for more on this and page 14 of our German economics primer on the election here.

In terms of when we’ll get the result, the first exit polls will be at 6pm CET, but those still come with some margin of error (0.5pts in 2021). But projections based on actual votes will be released from 6:30pm and updated throughout the evening. So by 8pm, it’s likely that the projections will be firm enough to have a clear view on coalition options and whether the two-third centrist parliamentary majority is achieved.

After the vote, the question will then turn to coalition negotiations, but these can take anything from a few weeks to several months based on prior experience. Indeed, after the 2017 election, it took almost 6 months before a new government was formed, as the initial three-way talks between the CDU/CSU, the Greens and the FDP broke down, so another grand coalition was eventually agreed between the CDU/CSU and the SPD. But last time, it was a shorter 8 weeks between the election day and reaching an agreement.

In terms of what it means for policy, clearly that will depend on the sort of government that’s formed. But our economists think it’s plausible to assume a net fiscal easing of around 0.5% of GDP by 2026. Much of that’s likely to be from higher defence spending. And beyond that, they see an easing of the debt brake at the state level as likely, which could unlock substantial public investment and consumption with high multipliers.

Away from the German election, the main story of the last 24 hours, as discussed at the top, was a pullback in US equities, though this decline did ease somewhat as the session went on. By the close, the S&P 500 was down -0.43%, having been -0.97% lower early on. The decline followed a weaker-than-expected profit forecast from Walmart (-6.53%), who were the worst performer in the Dow Jones (-1.01%) as a result. Moreover, that followed a worse-than-expected US retail sales number last week, which showed the biggest monthly contraction (-0.9%) since March 2023. So putting all that together, it added to fears that growth might be losing momentum into the new year. With this backdrop, bank stocks were the biggest decliners within the S&P 500 (-2.97%), giving up some of the outperformance that had propelled the sector to a +11.7% YTD gain prior to yesterday’s decline. Elsewhere in Europe, the STOXX 600 (-0.20%) also lost further ground, leaving the index on course to post its first weekly decline of 2025 so far.

On the rates side, the risk-off tone pushed yields lower on both sides of the Atlantic. But the main headlines came from US Treasury Secretary Scott Bessent, who said that moves to increase longer-term debt sales were “a long way off”. So that helped to push down longer-dated Treasury yields, with the 10yr Treasury yield down -2.8bps on the day to 4.51% and overnight trading at 4.49% (-1.95bps) . By contrast, the 2yr yield was little changed (+0.1bps to 4.27%), in part amid hawkish-leaning Fedspeak, as St Louis President Musalem said that policy should stay “modestly restrictive until inflation convergence is assured” He further added that “Around this baseline scenario, the risks of inflation stalling above 2% or moving higher seem skewed to the upside”.

Over in Europe bond yields saw similar declines, with yields on 10yr bunds (-2.4bps), OATs (-2.3bps) and BTPs (-2.5bps) all falling back. And with the risk-off mood driven more by the US economic outlook than policy headlines, the euro closed above 1.05 against the dollar for the first time since mid-December as the broad dollar index (-0.75%) lost substantial ground.

Asian equity markets are mostly rising this morning with the Hang Seng (+3.21%) seeing a renewed rally after Alibaba has jumped +13.2% on the back of strong earnings, thus helping the index notch its longest winning run since January 2023. On the mainland, the Shanghai Composite (+0.77%) is also trading noticeably higher as Alibaba’s stellar earnings renewed confidence in China’s major tech stocks. Elsewhere, the Nikkei (+0.18%) is also trading slightly higher while the KOSPI is flat. S&P 500 (-0.08%) and NASDAQ 100 (-0.09%) futures are a little softer.

Early morning data showed that Japan’s inflation accelerated to hit a 2yr high, rising +4.0% y/y in January from +3.6% in the prior month. Core CPI also rose more than expected, reaching 3.2% y/y, a one-and-a-half-year high and a tenth above consensus but with core-core in-line. The latest readings ties further into the BOJ’s projections of higher inflation, which is expected to elicit more rate hikes from the central bank this year.

Earlier today, the BOJ Governor Kazuo Ueda signalled that the central bank stands ready to increase government bond buying if long-term interest rates rise sharply, reiterating the BOJ’s long-standing commitment to supporting stable markets. Following the statement, yields on the 10yr JGBs fell -2.0bps to settle at 1.42% after briefly touching a fresh 15-year high of 1.459% while the Japanese yen (-0.33%) fell below the 150 level against the US per dollar, retreating from 11-weeks high. Meanwhile, markets are pricing in a roughly 84% chance of a 25bps hike at the July meeting, up from a 70% chance at the start of the month.

Looking at yesterday’s other data, the US weekly initial jobless claims ticked up to 219k (vs. 215k expected) in the week ending February 15. In addition, the continuing claims for the previous week moved up to 1.869m (vs. 1.868m expected). Meanwhile in the Euro Area, the European Commission’s consumer confidence indicator moved up to -13.6 in February (vs. -14.0 expected), which is its highest level since October.

To the day ahead now, and data releases include the flash PMIs for February, UK retail sales for January, and in the US there’s existing home sales for January, along with the University of Michigan’s final consumer sentiment index for February. From central banks, we’ll hear from Fed Vice Chair Jefferson, the ECB’s Lane, and Bank of Canada Governor Macklem.

Shares of UnitedHealth Group plunged in premarket trading after a Wall Street Journal report revealed that the Justice Department had launched a civil fraud investigation into the healthcare group’s billing practices, specifically examining how it records diagnoses that increase government payments to its Medicare Advantage plans.

The probe follows a series of WSJ reports last year that showed Medicare paid UnitedHealth billions for questionable diagnoses. DoJ attorneys recently interviewed medical providers cited in those articles. 

This investigation adds to mounting scrutiny of the $460 billion healthcare giant, which is also facing an antitrust probe and a DoJ lawsuit to block its $3.3 billion acquisition of home-health company Amedisys. 

UnitedHealth shares tumbled nearly 10% in premarket trading in response to WSJ’s report. Shares are down nearly 25% since Luigi Mangione, the 26-year-old accused of killing UnitedHealthcare CEO Brian Thompson in early December in Manhattan. 

Here’s more from WSJ’s report:

In December, the Journal reported that its analysis of billions of Medicare records showed that patients examined by UnitedHealth-employed doctors had huge increases in lucrative diagnoses after joining the company’s Medicare Advantage plans.

Doctors said UnitedHealth, based in the Minneapolis area, trained them to document revenue-generating diagnoses, including some they felt were obscure or irrelevant. The company also used software to suggest conditions and paid bonuses for considering the suggestions, among other tactics, according to the doctors.

Last summer, the Journal also reported that UnitedHealth added diagnoses to patients’ records for conditions that no doctor treated, which triggered an extra $8.7 billion in federal payments in 2021… 

Dow futures also tumbled on the news, as UnitedHealth is the second-largest contributor to the main equity index.

“When you find two cockroaches, it is almost a certainty that there are many more. And a half a trillion market cap for a health insurer makes no sense. I expect that there are many whistleblowers who have shared their work with the government and that more will be inspired to do so,” Bill Ackman wrote on X. 

When a company, in this case United Healthcare, attacks its critics, the probability that it has committed fraud or is guilty of a crime increases substantially. This morning the DOJ announced an investigation into UNH’s Medicare billing practices. The DOJ did not do this… https://t.co/BX3WtYzRJi

— Bill Ackman (@BillAckman) February 21, 2025

*Developing… 

A new subsea data cable incident occurred in the Baltic Sea on Thursday, raising concerns about the vulnerability of underwater infrastructure in the heavily trafficked shipping lane. The incident adds to increasing fears of potential sabotage in the region. 

Mattias Lindholm, a spokesman for the Swedish Coast Guard, told The New York Times that the C-Lion1 Finland-Germany fiber line was damaged off the Swedish island of Gotland in the Baltic Sea. He provided no details on when the damage occurred or what caused it.

Prime Minister Ulf Kristersson of Sweden said that his government took “all reports of possible damage to infrastructure in the Baltic Sea very seriously.” 

Finnish networking company Cinia, which operates the high-speed fiber line, told Bloomberg that the connection between Finland and Germany remains uninterrupted. However, they noted there appears to be a “scratch” on the line but provided no further details. 

What is clear is that the cable was not completely severed, unlike previous incidents in recent years.

Between November and January, there were three incidents of damaged undersea cables in the Baltic Sea – from data cables to power cables… 

“It’s a great concern to see the number of incidents over recent months in our critical undersea infrastructure,” Henna Virkkunen, executive vice president of the European Commission for tech sovereignty and security, told reporters in Helsinki, adding, “These incidents have the potential to disrupt vital services to our society, such as connectivity and electricity transmission, and also carry a significant security risk.”

However, a Washington Post article last month citing anonymous officials said these cable incidents were likely caused by negligence rather than sabotage. Sure.