Russia Ukraine peace talks and forever running on the shifting sands

Markets

Markets were in full-on whiplash mode Wednesday as investors scrambled to digest a hotter-than-expected January inflation print. The S&P 500 pared most of its early 1.1% drop, fueled by a Tesla-led rebound in megacaps and Meta’s relentless 18-session winning streak. But the real story was in rates, as Treasuries got absolutely steamrolled—the worst beating since the mini Fed tantrum in December—as the inflation data torched hopes for a dovish pivot anytime soon.

Core CPI, which strips out food and energy, came in at 0.4% month-over-month and 3.3% year-over-year—both above December’s levels, dashing expectations for continued disinflation. The reaction was swift: traders scrambled to reprice Fed expectations, with swap markets now leaning heavily toward just one rate cut this year—if that. The 10-year Treasury yield spiked 10 basis points to 4.64%, reinforcing the notion that the Fed might have to sit on its hands longer than markets had hoped.

The chart below highlights a clear deterioration in the inflation trend, marking the highest month-over-month core inflation print in two years. This is a major setback for the disinflation narrative. To hit the Fed’s 2% year-on-year inflation target, we’d need to average 0.17% MoM over time—today’s reading blows that threshold out of the water.

While January's consumer price inflation report might not offer a definitive roadmap for the year ahead, it does set a concerning baseline—one that’s far too high for comfort. The persistence of elevated core inflation suggests that disinflation isn’t unfolding as smoothly as many had hoped. Instead of providing clarity, this report ensures that the Fed remains on edge, reinforcing the case for a cautious, data-dependent approach to rate cuts. Markets may still be pricing in easing later this year, but if inflation refuses to cooperate, we might even talk about rate hikes before the year ends.

Meanwhile, investors are bracing for another potential policy bombshell from Trump, with reciprocal tariffs expected to be announced before the end of the week. There’s a lingering sense of cautious optimism that these measures might be more tactical than the scorched-earth rhetoric from the campaign trail. But the real risk lies in the follow-through—should this escalate into a broader tariff war, market sentiment could flip risk-off in a hurry.

Beyond the immediate knee-jerk reactions, there’s a growing concern that Trump’s policy cocktail—tariffs and tighter immigration restrictions—could entrench inflationary pressures. That would put the Fed in an even tougher spot, making it harder to justify rate cuts this year. If inflation expectations start creeping higher again, the market could be in for a fresh repricing of yields, and any relief rallies in risk assets might be short-lived.

Yet, despite these headwinds, risk appetite refuses to roll over. Emerging market stocks and currencies are still floating above the turbulence, seemingly unshaken by the looming specter of sweeping U.S. tariffs. That resilience got a turbocharge late Wednesday when reports surfaced that President Trump had dialed up both Vladimir Putin and Volodymyr Zelenskiy, urging immediate peace talks to end the war in Ukraine.

The market reaction was swift—oil took a 2.5% dive, the dollar lost steam, and Wall Street trimmed its losses as traders recalibrated their geopolitical risk models. If this push for peace gains traction, expect an even bigger unwind in war-premium assets and a fresh bid for riskier plays. Asian stock futures turned green overnight, setting the stage for a potential rally extension until the next economic landmine detonates.

While many traders have already factored a potential Russia-Ukraine ceasefire into their investment playbook this year, it’s unlikely that markets have fully priced in the impact. It was part of our base case for much lower oil prices in 2025, but as with any geopolitical wildcard, the timeline and execution remain unpredictable.

That said, geopolitics is never a straight line. Markets love a good narrative, but they hate uncertainty even more. Until there’s a concrete resolution, traders will likely remain cautiously optimistic—leaning into risk, but with one foot firmly on the brake, ready to pivot at the first sign of turbulence.

Forex markets

EUR/USD initially cratered to 1.0340 on the hot CPI print, only to stage a jaw-dropping reversal, ripping through 1.0400 as real-money flows seemingly forced a quiet re-rating of the euro. The surge was fueled by European equity outperformance and whispers of a potential ceasefire in Eastern Europe—both massive sentiment boosters.

Still, the move felt misaligned with the storm clouds gathering over Europe in the form of looming Trump tariffs. While the temptation to chase higher was real, I wasn’t about to ignore the bigger picture. Instead, I took the market’s gift below 1.0350 to unwind my EUR/USD shorts—sometimes, luck hands you the exit door, and you don’t ask twice.

The bigger issue? There’s a creeping sense of fatigue in some of the Trump trades—this year’s back-and-forth on tariffs has made it increasingly difficult to nail down a definitive playbook. With inflation surprising to the upside, bonds getting battered, and global trade uncertainty still looming large, we’re very much in a market that’s running on shifting sands.

China markets (DeepSeek, China’s “Sputnik” moment?)

While the stimulus-fueled rally fizzled out as Beijing held back on deploying the “big guns,” a new investment thesis has taken shape over the Lunar New Year break. DeepSeek, a relatively obscure Chinese AI upstart, has upended the narrative, proving that China’s tech ambitions can still defy constraints. The company’s AI model, developed on a fraction of OpenAI’s budget and despite stringent US chip export controls, has sent shockwaves through markets, forcing investors to reassess China’s tech landscape.

The latest rally isn’t just another fleeting hype cycle—it’s a recalibration of expectations. Investors are now weighing the possibility that China’s internet giants, long seen as playing catch-up, may actually have a viable AI playbook of their own. If DeepSeek’s breakthrough is any indication, the “China can’t innovate” argument is losing credibility fast. Whether this translates into sustained gains for China’s battered tech sector remains to be seen, but for now, the market is paying attention.

In a Feb. 5 Deutsche Bank report, analyst Peter Milliken argued that China’s Sputnik moment had arrived, and that as the country outcompetes the rest of the world, investors will eventually want to pay for its dominance. China’s valuation discount will disappear. ( Bloomberg)

The real debate now is not whether DeepSeek’s breakthrough is significant, but how to trade it. Some asset managers view the China AI-fueled rally as a classic short-selling opportunity, wary of getting burned again after Beijing’s brutal regulatory clampdown during the pandemic. The scars from sudden policy shifts, tech sector crackdowns, and a still-fragile economic recovery make it hard for many institutional players to wade back into Chinese assets with confidence.

For those still sitting on the sidelines, skepticism runs deep. The regulatory overhang remains a major deterrent, and while China’s AI ambitions are undeniable, questions linger about scalability, monetization, and the long-term sustainability of homegrown tech innovation without access to top-tier U.S. chips. The bullish counterpoint? DeepSeek's success could signal that China is building workarounds, defying expectations, and carving out its own AI ecosystem—one that global investors may soon be forced to take seriously.

For now, the market remains divided, with short sellers testing the waters while opportunistic buyers weigh the potential of a genuine AI renaissance in China. The coming weeks will determine whether DeepSeek is a fleeting catalyst or the spark that reshapes sentiment around Chinese tech for good.